Burrell Company purchased a machine for $49000 on January 2, 2016. The machine h

Question

Burrell Company purchased a machine for $49000 on January 2, 2016. The machine has an estimated service life of 5 years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $24500 each year. The tax rate is 25%.

Required:

Compute the rate of return earned (on the average net asset value) by the company each year of the asset's life under the straight-line and the double-declining-balance depreciation methods. Assume that the machine is the company's only asset.

Straight-line method. Do not round intermediate calculations. Round final answer to two decimal places.

2016?

2017?

2018?

2019?

2020?

Double-declining-balance depreciation method. Do not round intermediate calculations. Round final answer to two decimal places.

2016?

2017?

2018?

2019?

2020?

Explanation / Answer

Answer 1 Straight line depreciation per year = (Cost - residual value) / estimated service life = ($49000 - $0) / 5 years = $9800 Net Income per year Income before depreciation and tax $24,500.00 Less : Depreciation $9,800.00 Profit before tax $14,700.00 Less : Tax @ 25% $3,675.00 Net Income per year $11,025.00 Calculation of average net asset value Year Book value asset at the beginning Depreciation Book value asset at the end Average asset value A B C D (B+D)/2 2016 $49,000.00 $9,800.00 $39,200.00 $44,100.00 2017 $39,200.00 $9,800.00 $29,400.00 $34,300.00 2018 $29,400.00 $9,800.00 $19,600.00 $24,500.00 2019 $19,600.00 $9,800.00 $9,800.00 $14,700.00 2020 $9,800.00 $9,800.00 $0.00 $4,900.00 Calculation of rate of return earned by the company each year Year Net Income Average asset value Rate of return A B C (B/C)*100 2016 $11,025.00 $44,100.00 25.00% 2017 $11,025.00 $34,300.00 32.14% 2018 $11,025.00 $24,500.00 45.00% 2019 $11,025.00 $14,700.00 75.00% 2020 $11,025.00 $4,900.00 225.00% Answer 2 Depreciation for a period under double declining method = 2 x Straight line depreciation percent x book value at beginning of period Straight line depreciation percent = (Depreciation per year / Depreciable value)*100 = ($9800 / $49000)*100 = 20% Calculation of depreciation under DDB method and average asset value for each year Year Depreciation rate under DDB (2*20%) Book value of asset at the beginning Depreciation Book value of asset at the end Average asset value A B C D = C * B E (C+E)/2 2016 40.00% $49,000.00 $19,600.00 $29,400.00 $39,200.00 2017 40.00% $29,400.00 $11,760.00 $17,640.00 $23,520.00 2018 40.00% $17,640.00 $7,056.00 $10,584.00 $14,112.00 2019 40.00% $10,584.00 $4,233.60 $6,350.40 $8,467.20 2020 40.00% $6,350.40 $2,540.16 $3,810.24 $5,080.32 Calculation of rate of return earned by the company each year Year Net Income Average asset value Rate of return A B C (B/C)*100 2016 $11,025.00 $39,200.00 28.13% 2017 $11,025.00 $23,520.00 46.88% 2018 $11,025.00 $14,112.00 78.13% 2019 $11,025.00 $8,467.20 130.21% 2020 $11,025.00 $5,080.32 217.01%

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