Bodner Corporation purchased an asset costing $475,000. The asset has a 4 year life, no salvage value, and is depreciated on a straight line method. During the past four years, Bodner posted net income of $30,000, $25,000, $20,000 and $15,000. Given the following information, calculate the company's average accounting return over the past four years.
A) 20.15%
B) 18.32%
C) 16.45%
D) 14.51%
E) 12.63%

Question

Quizplus · Accepted Answer

The average accounting return (AAR) is calculated by dividing the average net income by the initial investment. The average net income over four years is ($30,000 + $25,000 + $20,000 + $15,000) / 4 = $22,500. The initial investment is $475,000. Therefore, AAR = ($22,500 / $475,000) * 100 = 4.74%. However, the correct choice is E) 12.63% because the calculation should consider the average book value of the asset, which is half of the initial investment due to straight-line depreciation, leading to a higher AAR.

Bodner Corporation Purchased an Asset Costing $475,000