Accounting: What the Numbers Mean 11th Edition by Wayne McManus,Daniel Viele,David Marshall

Exercise 15

Capitalizing versus expensing-effect on ROI Early in January 2016, Tellco, Inc., acquired a new machine and incurred $200,000 of interest, installation, and overhead costs that should have been capitalized but were expensed. The company earned net operating income of $1,500,000 on average total assets of $10,000,000 for 2016.
Assume that the total cost of the new machine will be depreciated over 10 years using
the straight-line method.
Required:
a. Calculate the ROI for Tellco, Inc., for 2016.
b. Calculate the ROI for Tellco, Inc., for 2016, assuming that the $200,000 had been capitalized and depreciated over 10 years using the straight-line method. (Hint: There is an effect on net operating income and average assets.)c. Given your answers to a and b , why would the company want to account for this expenditure as an expense?
d. Assuming that the $200,000 is capitalized, what will be the effect on ROI for 2017 and subsequent years, compared to expensing the interest, installation, and overhead costs in 2016? Explain your answer.