The asset section of the January 1, 20X7, balance sheet of Petticoat Company includes a machine which was acquired on January 1, 20X3.The machine's original cost was $500,000, and the estimated life was determined to be 10 years.The estimated residual value was zero, and the straight-line method of depreciation was chosen.If operating income before depreciation is $90,000, the rate of return on average net book value for 20X7 is _____.
A)14.55%
B)13.33%
C)16.00%
D)32.79%

Question

Quizplus · Accepted Answer

The machine's original cost is $500,000 with a useful life of 10 years and no residual value, so annual depreciation is $500,000 / 10 = $50,000. By the beginning of 20X7, the machine has been depreciated for 4 years, totaling $200,000 in accumulated depreciation ($50,000 * 4). The net book value at the beginning of 20X7 is $500,000 - $200,000 = $300,000. The average net book value for 20X7 is the average of the beginning and ending net book values for the year. By the end of 20X7, another $50,000 of depreciation would have been recognized, making the ending net book value $250,000. The average net book value is ($300,000 + $250,000) / 2 = $275,000. The rate of return on average net book value is operating income before depreciation divided by the average net book value. Therefore, the rate of return is $90,000 / $275,000 = 0.3273 or 32.73%, rounded to 32.79% as per the options provided.

The Asset Section of the January 1, 20X7, Balance Sheet