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Bettie Ltd reported a current years profit of $2 500 000. Additional information: Prior period sales included

Question:

Bettie Ltd reported a current year’s profit of $2 500 000.

Additional information:

Prior period sales included in current sales revenues, $15 600. Gain on sale of a division of the entity, $45 200. New asset acquired — related depreciation expense for the period $6000. Contingent liability of $32 000 reported in the notes to the financial statements.


Required

(a) Determine Bettie Ltd’s earning power.

(b) Why is it important for potential investors to understand the concept of earning power when deciding whether to invest in an entity? 

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a Bettie Ltds earning power Sales revenues Costs of goods sold Earnings before interest and tax e...View the full answer


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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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