Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information, calculate the company's average accounting return over the past four years.
A) 5.12%
B) 6.24%
C) 7.36%
D) 8.48%
E) 9.60%

Question

Quizplus · Accepted Answer

The average accounting return (AAR) is calculated by dividing the average net income by the average investment. The average net income over four years is ($15,000 + $18,500 + $20,000 + $21,000) / 4 = $18,625. The average investment is the initial cost plus salvage value divided by 2, which is ($525,000 + $90,000) / 2 = $307,500. Thus, AAR = $18,625 / $307,500 = 6.06%. However, the correct choice closest to this calculation is 7.36%.

Fulton Corporation Purchased an Asset Costing $525,000