The asset section of the January 1, 20X7 balance sheet of Murphy Company includes a machine, which was acquired on January 1, 20X1. The machine's original cost was $1,000,000, 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 amortization is $280,000, the rate of return on gross book value for 20X7 is
A) 18 percent.
B) 28 percent.
C) 45 percent.
D) 70 percent.

Question

Quizplus · Accepted Answer

The annual depreciation is $100,000 ($1,000,000 / 10 years). The gross book value remains $1,000,000. Operating income after depreciation is $280,000 - $100,000 = $180,000. The rate of return on gross book value is $180,000 / $1,000,000 = 18%.

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