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Early in January 2013, Tyler, Inc., acquired a new machine and incurred $9,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $101,000 on average total assets of $890,000 for 2013. Assume that the total cost of the new machine will be depreciated over 10 years using the straight-line method.

rev: 02_24_2015_QC_CS-8236

References

Section BreakProblem 6-22 Capitalizing versus expensing-effect on ROI LO 2, 4

1.

value: 3.00 points

Required information

Problem 6-22 Part a

Required:
a.	Calculate the ROI for Tyler, Inc., for 2013. (Round your answer to 1 decimal place.)

rev: 02_24_2015_QC_CS-8236

References

eBook & Resources

WorksheetDifficulty: HardLearning Objective: 06-04 Describe the accounting treatment of repair and maintenance expenditures.

Problem 6-22 Part aLearning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment.

Ask your instructor a questionCheck my work

2.

value: 3.00 points

Required information

Problem 6-22 Part b

b.	Calculate the ROI for Tyler, Inc., for 2013, assuming that the $9,000 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.) (Round your answer to 1 decimal place.)

rev: 02_24_2015_QC_CS-8236

References

eBook & Resources

WorksheetDifficulty: HardLearning Objective: 06-04 Describe the accounting treatment of repair and maintenance expenditures.

Problem 6-22 Part bLearning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment.

Ask your instructor a questionCheck my work

3.

value: 3.00 points

Required information

Problem 6-22 Part c

c.	Given your answers to part a and b, why would the company want to account for this expenditure as an expense? (Select all that apply.)

Expensing an item immediately increases company's net profit

Less time, effort and cost is spent for accounting purposes

Expensing an item immediately reduces the company's tax expense in the future

Expensing an item immediately reduces the company's tax expense

References

eBook & Resources

Check All That ApplyDifficulty: HardLearning Objective: 06-04 Describe the accounting treatment of repair and maintenance expenditures.

Problem 6-22 Part cLearning Objective: 06-02 Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment.

Ask your instructor a question

4.

value: 1.00 points

Required information

Problem 6-22 Part d

d.	Assuming that the $9,000 is capitalized, what will be the effect on ROI for 2014 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2013?

In 2014 and subsequent years, ROI will be lower

In 2014 and subsequent years, ROI will be higher

In 2014 and subsequent years, ROI will not be affected