Question

Burrell Company purchased a machine for $43,000 on January 2, 2019. The machine has an estimated service life of 5 years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $21,500 each year. The tax rate is 30%.

Required:

Compute the rate of return earned (on the average net asset value) by the company each year of the asset's life under the straight-line and the double-declining-balance depreciation methods. Assume that the machine is the company's only asset.

Straight-line method. If required, round to one decimal place.

2019	%
2020	%
2021	%
2022	%
2023	%

Double-declining-balance depreciation method. Round to two decimal places. Round your intermediate dollar value calculations to the nearest whole number.

2019	%
2020	%
2021	%
2022	%
2023	%

Answer 1

	Machine cost			$        43,000
Less:	Residual value			$                 -
	Depreciable cost			$        43,000
Divided by:	Estimated service life			5
	Depreciation Expense per Year			$          8,600
	Year	Beginning asset value	Less: Depreciation Expense	Ending asset value
	2019	$                43,000	$                 8,600	$        34,400
	2020	$                34,400	$                 8,600	$        25,800
	2021	$                25,800	$                 8,600	$        17,200
	2022	$                17,200	$                 8,600	$          8,600
	2023	$                  8,600	$                 8,600	$                 -

Straight-line method
Year	2019	2020	2021	2022	2023
Income before depreciation and taxes	$                21,500	$               21,500	$        21,500	$            21,500	$         21,500
Less: Depreciation Expense	$                  8,600	$                 8,600	$          8,600	$              8,600	$            8,600
Income before taxes	$                12,900	$               12,900	$        12,900	$            12,900	$         12,900
Less: Income taxes (Income before taxes * 30%)	$                  3,870	$                 3,870	$          3,870	$              3,870	$            3,870
Net income	$                  9,030	$                 9,030	$          9,030	$              9,030	$            9,030
Beginning asset value	$                43,000	$               34,400	$        25,800	$            17,200	$            8,600
Ending asset value	$                34,400	$               25,800	$        17,200	$              8,600	$                   -
Total	$                77,400	$               60,200	$        43,000	$            25,800	$            8,600
Average asset value (Total / 2)	$                38,700	$               30,100	$        21,500	$            12,900	$            4,300
Net income	$                  9,030	$                 9,030	$          9,030	$              9,030	$            9,030
Divided by: Average asset value	$                38,700	$               30,100	$        21,500	$            12,900	$            4,300
Rate of return earned	23.3%	30.0%	42.0%	70.0%	210.0%

Depreciation rate under straight-line method (1/5)					20%
Depreciation rate under the double-declining-balance depreciation method (2*20%)					40%
Double-declining-balance depreciation method
Year	Beginning asset value	Less: Depreciation Expense	Ending asset value	Calculation for depreciation
2019	$                43,000	$               17,200	$        25,800	Depreciation = 43000 * 40% = 17200
2020	$                25,800	$               10,320	$        15,480	Depreciation = 25800 * 40% = 10320
2021	$                15,480	$                 6,192	$          9,288	Depreciation = 15480 * 40% = 6192
2022	$                  9,288	$                 3,715	$          5,573	Depreciation = 9288 * 40% = 3715
2023	$                  5,573	$                 5,573	$                 -	Depreciation = Beginning Assets value - Residual value = 5573-0 = 5573
Double-declining-balance depreciation method
Year	2019	2020	2021	2022	2023
Income before depreciation and taxes	$                21,500	$               21,500	$        21,500	$            21,500	$         21,500
Less: Depreciation Expense	$                17,200	$               10,320	$          6,192	$              3,715	$            5,573
Income before taxes	$                  4,300	$               11,180	$        15,308	$            17,785	$         15,927
Less: Income taxes (Income before taxes * 30%)	$                  1,290	$                 3,354	$          4,592	$              5,336	$            4,778
Net income	$                  3,010	$                 7,826	$        10,716	$            12,449	$         11,149
Beginning asset value	$                43,000	$               25,800	$        15,480	$              9,288	$            5,573
Ending asset value	$                25,800	$               15,480	$          9,288	$              5,573	$                   -
Total	$                68,800	$               41,280	$        24,768	$            14,861	$            5,573
Average asset value (Total / 2)	$                34,400	$               20,640	$        12,384	$              7,431	$            2,787
Net income	$                  3,010	$                 7,826	$        10,716	$            12,449	$         11,149
Divided by: Average asset value	$                34,400	$               20,640	$        12,384	$              7,431	$            2,787
Rate of return earned	8.75%	37.92%	86.53%	167.53%	400.04%