Capitalizing vs. expensing - effect on ROI and operating income.
During the first month of its current fiscal year, Away Co. incurred repair costs of $20,000 on a machine that had five years of remaining depreciable life. The repair cost was inappropriately capitalized. Away Co. reported operating income of $160,000 for the current year.
A. Assuming that Away Co. took a full year's straight-line depreciation expense in the current year, calculate the operating income that should have been reported for the current year.
B. Assume that Away Co.'s total assets at the end of the prior year and at the end of the current year were $940,000 and $1,020,000 respectively. Calculate ROI (based on operating income) for the current year using the originally reported data and then using the corrected data.
C. Explain th effect on ROI of subsequent years if the error is not corrected.