Early in January 2019, Tellco Inc. acquired a new machine and incurred $100,000 of interest, installation, and

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Early in January 2019, 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 $750,000 on average total assets of $5,000,000 for 2019. Assume that the total cost of the new machine will be depreciated over 8 years using the straight-line method.


Required:

a. Calculate the ROI for Tellco for 2019.

b. Calculate the ROI for Tellco for 2019, assuming that the $100,000 had been capitalized and depreciated over 8 years using the straight-line method. 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 2020 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2019? Explain your answer.

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Accounting What the Numbers Mean

ISBN: 978-1260565492

12th edition

Authors: David Marshall, Wayne McManus, Daniel Viele

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