Question
Early in January 2019, Tellco Inc. acquired a new machine and incurred $12,000 of interest, installation, and overhead costs that should have been capitalized but
Early in January 2019, Tellco Inc. acquired a new machine and incurred $12,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $85,000 on average total assets of $795,000 for 2019. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method.
- Required:Calculate the ROI for Tellco for 2019.
- Calculate the ROI for Tellco for 2019, assuming that the $12,000 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.)
- Given your answers to partsaandb, why would the company want to account for this expenditure as an expense?
- Assuming that the $12,000 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?
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Entrepreneurship
Authors: Andrew Zacharakis, William D Bygrave
5th Edition
1119563097, 9781119563099
