The asset section of the January 1, 20X9, balance sheet of Junction Company includes a machine which was acquired on January 1, 20X5. 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 $95,000, the rate of return on gross book value for 20X9 is:
A) 9%
B) 18%
C) 14.4%
D) 35%

Question

Quizplus · Accepted Answer

The gross book value of the machine is $500,000. Annual depreciation is $50,000 ($500,000/10 years). Operating income after depreciation for 20X9 is $45,000 ($95,000 - $50,000). The rate of return on gross book value is $45,000 / $500,000 = 9%.

The Asset Section of the January 1, 20X9, Balance Sheet