Capitalizing versus expensing—effect on ROI Early in January 2010, Tellco, Inc., acquired a new machine and incurred $100,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $1,000,000 on average total assets of $8,000,000 for 2010. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method.
Required:
a. Calculate the ROI for Tellco, Inc., for 2010.
b. Calculate the ROI for Tellco, Inc., for 2010, assuming that the $100,000 had been capitalized and depreciated over 10 years using the straight-line method. (Hint: There is an effect on net operating income and average assets.)
c. Given your answers to a and b, why would the company want to account for this expenditure as an expense?
d. Assuming that the $100,000 is capitalized, what will be the effect on ROI for 2011 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2010? Explain your answer.
We need at least 10 more requests to produce the solution.
0 / 10 have requested this problem solution
The more requests, the faster the answer.