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.
A) 35.85%
B) 30.15%
C) 25.85%
D) 20.15%
E) 15.85%

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 first year, which is not given in the question. The ending total assets is the total assets at the end of the fourth year, which is also not given in the question. However, we can calculate the ending total assets by adding the net income over the past four years to the beginning total assets. The net income over the past four years is 116,500, so the ending total assets is 450,000 + 116,500 = 566,500. The average total assets is (450,000 + 566,500) / 2 = 508,250. The average accounting return is 116,500 / 508,250 = 0.231, or 23.1%. The closest answer choice is A) 35.85%, which is incorrect.

ABC Corporation Purchased an Asset Costing $450,000