5) One way to achieve greater comparability of historical-cost based ROIs is to restate performance in dollars.
Use the information below to answer the following question(s).
The following data are available for a foundry operation started as a new company four years ago when the construction cost index was 125:
Current liabilities
$170,000
Operating income
$176,200
NBV long-term assets (end year 3)
$687,500
Current assets
$300,000
Gross book value *
$1,100,000
Estimated total useful life *
8 years
Age of assets *
4 years
Construction cost index end of year 4
150
* = long-term assets at historical cost
6) What is the NBV of the long-term assets at current cost at the end of year 4?
A) $660,000
B) $800,000
C) $960,000
D) $1,180,000
E) $1,760,000
7) What is the current-cost depreciation in year 4 dollars?
A) $165,000
B) $200,000
C) $240,000
D) $295,000
E) $440,000
Use the information below to answer the following question(s).
Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Bleach-2. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for the year just ended:
Assets
Book value
Assets
Current value
Income
Book value
Income
Current value
Bleach
$225,000
$300,000
$150,000
$155,000
Bleach-2
450,000
250,000
100,000
105,000
The company is currently using a required rate of return of 15 percent.
8) What are Bleach's and Bleach-2's return on investment based on current values?
A) 0.22; 0.67
B) 0.42; 0.52
C) 0.52; 0.42
D) 0.67; 0.22
E) 0.50; 0.45
9) What are Bleach's and Bleach-2's residual incomes, based on current values, respectively?
A) $116,250; $37,500
B) $110,000; $67,500
C) $67,500; $110,000
D) $37,500; $116,250
E) $115,340; $80,000
Answer the following question(s) using the information below:
Carriage Ltd. manufactures baby carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for the year just ended:
ASSETS
INCOME
Book value
Current value
Book value
Current value
Wheels
$485,000
$550,000
$120,000
$160,000
Assembly
$750,000
$1,200,000
$160,000
$172,500
The company is currently using a 12% required rate of return.
10) What are Wheels's and Assembly's return on investment based on book values, respectively?
A) 0.21; 0.25
B) 0.25; 0.21
C) 0.14; 0.29
D) 0.29; 0.14
E) 0.33; 0.23
11) What are Wheels's and Assembly's return on investment based on current values, respectively?
A) 0.21; 0.25
B) 0.25; 0.21
C) 0.14; 0.29
D) 0.29; 0.14
E) 0.33; 0.23
12) What are Wheels's and Assembly's residual incomes based on book values, respectively?
A) $74,000; $28,500
B) $61,800; $70,000
C) $63,500; $59.500
D) $28,500; $74,000
E) $101,800; $70,000
13) What are Wheels's and Assembly's residual incomes based on current values, respectively?
A) $70,000; $28,500
B) $94,000; $28,500
C) $94,000; $70,000
D) $28,500; $94,000
E) $61,800; $70,000
14) The cost today of purchasing an asset identical to the one currently held is called a(n)
A) actual cost.
B) current cost.
C) dual cost.
D) fixed cost.
E) sunk cost.
