Response to the following problem:
Capitalizing versus expensing-effect on ROI and operating income
During the first month of its current fiscal year, Green Co. incurred repair costs of $20,000 on a machine that had five years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $160,000 for the current year.
Required:
a. Assuming that Green 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 Green 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 corrected data.
c. Explain the effect on ROI of subsequent years if the error is not corrected.