During the first month of its current fiscal year, Green Co. incurred repair cos

Question

During the first month of its current fiscal year, Green Co. incurred repair costs of $21,000 on a machine that had 4 years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $153,000 for the current year.

Assuming that Green Co. took a full year's straight-line depreciation expense in the current year, calculate the operating income that should have been reported for the current year.

Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $949,000 and $1,018,000, respectively. Calculate ROI (based on operating income) for the current year using the originally reported data and then using corrected data.

Original data % =

Corrected data % =

c. Indicate the effect of ROI on subsequent years if the erro is not corrected

1. ROI will be too high

2. ROI will remain the same

3. ROI will be too low

During the first month of its current fiscal year, Green Co. incurred repair costs of $21,000 on a machine that had 4 years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $153,000 for the current year.

Explanation / Answer

a)

Assuming that Green Co. took a full year's straight-line depreciation expense in the current year, calculate the operating income that should have been reported for the current year.
The whole $21,000 should have been expensed during the first year. Instead, only 21,000 / 4 = $5,250 was expensed to depreciation.
21,000 - 5,250 = $15,750 understated expenses
153,000 - 15,750 = $137,250 corrected operating income

(b) Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $949,000 and $1,018,000, respectively. Calculate ROI (based on operating income) for the current year using the originally reported data and then using corrected data
Are you sure you don't mean ROA (return on assets). There is no investment information.
Net Income / Average Assets = ROA

Original data

(949,000 + 1,018,000) / 2 = $983,500 avg. assets
153,000 / 983,500 = 15.55% ROA

Corrected Data
Operating Income = $137,250
1,018,000 + 5,250 = $1,023,250 current year assets
(949,000 + 1,023,250) / 2 = $986,125 avg. assets

137,250 / 986,125 = 13.91% ROA corrected operating income

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