Bajalia Company compiled the following information for the year ending December 31, 2014:
$\begin{array}{ll}
\text {Research and development costs }&\$800,000 \
\text {Sales }& 6,400,000\
\text {Net income }&1,200,000 \
\text {Interest expense }&400,000 \
\text {income tax rate }& 30\%\
\end{array}$

At the end of 2014, total assets totaled $6,900,000. Bajalia's total current liabilities were $1,400,000, of which $600,000 were interest-bearing obligations. Bajalia's cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must Bajalia make to income for accounting distortions if EVA is to be calculated for 2014?

Question

Bajalia Company compiled the following information for the year ending December 31, 2014:
$\begin{array}{ll}
\text {Research and development costs  }&\$800,000 \
\text {Sales }& 6,400,000\
\text {Net income }&1,200,000 \
\text {Interest expense }&400,000 \
\text {income tax rate }& 30\%\
\end{array}$

At the end of 2014, total assets totaled $6,900,000. Bajalia's total current liabilities were $1,400,000, of which $600,000 were interest-bearing obligations. Bajalia's cost of capital is 12 percent and it amortizes intangibles over 4 years. What adjustment must Bajalia make to income for accounting distortions if EVA is to be calculated for 2014?

Quizplus · Accepted Answer

To calculate the adjustment for EVA, we need to add back the after-tax R&D expense to the net income. The after-tax R&D expense is $800,000 * (1 - 0.30) = $560,000. Since the R&D is amortized over 4 years, the annual amortization is $560,000 / 4 = $140,000. Therefore, the adjustment to income is $560,000 - $140,000 = $420,000.

Bajalia Company Compiled the Following Information for the Year Ending