ABC Corporation purchased an asset costing $450,000. The asset has an 8 year life, a $50,000 salvage value, and is depreciated on a straight line method. During the past four years, ABC posted net income of $98,000, $112,000, $134,000 and $122,000. Given the following information, calculate the company's average accounting return over the past four years.

Question

Quizplus · Accepted Answer

The average accounting return is calculated by dividing the average net income by the average total assets. The average net income is the sum of the net incomes over the past four years divided by 4, which is (98,000 + 112,000 + 134,000 + 122,000) / 4 = 116,500. The average total assets is the sum of the beginning and ending total assets over the past four years divided by 2. The beginning total assets is the total assets at the beginning of the year, and the ending total assets is the total assets at the end of the year. The total assets at the beginning of the year is not given in the question, so we will assume that it is equal to the total assets at the end of the previous year. The total assets at the end of the year is the total assets at the beginning of the year plus the net income for the year minus the dividends paid for the year. The dividends paid for the year is not given in the question, so we will assume that it is zero. Therefore, the average total assets is [(450,000 + 450,000 + 462,000 + 474,000 + 486,000) / 2] = 464,500. The average accounting return is therefore 116,500 / 464,500 = 0.2509, or 25.09%.

ABC Corporation Purchased an Asset Costing $450,000