Question

Selected ledger account balances for Business Solutions follow:

	For three months Ended December 31, 2017	For three months Ended march 31, 2018
Office equipment	\( 8,000	\)8,000
Accumulated depreciation – office equipment	400	800
Computer equipment	20,000	20,000
Accumulated depreciation- computer equipment	1,250	2,500
Total revenue	31,284	44,000
Total assets	83,460	120,268

Required

1. Assume that Business Solutions does not acquire additional office equipment or computer equipment in 2018. Compute amounts for the year ended December 31, 2018, for Depreciation Expense—Office Equipment and for Depreciation Expense—Computer Equipment (assume use of the straight-line method).

2. Given the assumptions in part 1, what is the book value of both the office equipment and the computer equipment as of December 31, 2018?

3. Compute the three-month total asset turnover for Business Solutions as of March 31, 2018. Use total revenue for the numerator and average the December 31, 2017, total assets and the March 31, 2018, total assets for the denominator. Interpret its total asset turnover if competitors average 2.5 for annual periods. (Round turnover to two decimals.)

Short answer

1. The depreciation expense of office equipment is $1,600 and the depreciation expense for computer equipment is $5,000.
2. The book value of the office equipment is $6,000 and the book value of the computer equipment is $13,750.
3. The total asset turnover ratio is 0.43

Step-by-step solution

Step 1:Depreciation

Depreciation is defined as a reduction in the book value of the assets that occurs due to their usage and wear & tear in their useful life.

(1) Computing Depreciation

Depreciation expense for office equipment: -

Given: - depreciation for 3 months = $400

$\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{f}\mathit{o}\mathit{r}\mathbf{12}\mathit{m}\mathit{o}\mathit{n}\mathit{t}\mathit{h}\mathit{s}\mathit{o}\mathit{r}\mathbf{1}\mathit{y}\mathit{e}\mathit{a}\mathit{r}\mathbf{=}\mathbf{400}\mathbf{\times }\mathbf{4}\mathbf{=}\mathit{\$}\mathbf{1}\mathbf{,}\mathbf{600}$

The depreciation expense of office equipment is $1,600.

Depreciation expense for computer equipment: -

Given: - depreciation for 3 months = $1,250

$\mathit{d}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathit{f}\mathit{o}\mathit{r}\mathbf{12}\mathit{m}\mathit{o}\mathit{n}\mathit{t}\mathit{h}\mathit{s}\mathit{o}\mathit{r}\mathbf{1}\mathit{y}\mathit{e}\mathit{a}\mathit{r}\mathbf{=}\mathbf{1}\mathbf{,}\mathbf{250}\mathbf{\times }\mathbf{4}\mathbf{=}\mathit{\$}\mathbf{5}\mathbf{,}\mathbf{000}$

The depreciation expense for computer equipment is $5,000.

(2) Book value of office equipment and computer equipment

Book value of office equipment: -

$\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{a}\mathit{t}\mathit{t}\mathit{h}\mathit{e}\mathit{b}\mathit{e}\mathit{g}\mathit{i}\mathit{n}\mathit{n}\mathit{i}\mathit{n}\mathit{g}\mathbf{=}\mathbf{8}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{400}\mathbf{=}\mathit{\$}\mathbf{7}\mathbf{,}\mathbf{600}$

$\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{a}\mathit{t}\mathit{t}\mathit{h}\mathit{e}\mathit{e}\mathit{n}\mathit{d}\mathbf{=}\mathbf{7}\mathbf{,}\mathbf{600}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{600}\mathbf{=}\mathit{\$}\mathbf{6}\mathbf{,}\mathbf{000}$

The book value of the office equipment is $6,000.

Book value of computer equipment: -

$\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{a}\mathit{t}\mathit{t}\mathit{h}\mathit{e}\mathit{b}\mathit{e}\mathit{g}\mathit{i}\mathit{n}\mathit{n}\mathit{i}\mathit{n}\mathit{g}\mathbf{=}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{1}\mathbf{,}\mathbf{250}\mathbf{=}\mathit{\$}\mathbf{18}\mathbf{,}\mathbf{750}$

$\mathit{b}\mathit{o}\mathit{o}\mathit{k}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathit{a}\mathit{t}\mathit{t}\mathit{h}\mathit{e}\mathit{e}\mathit{n}\mathit{d}\mathbf{=}\mathbf{18}\mathbf{,}\mathbf{750}\mathbf{-}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{=}\mathit{\$}\mathbf{13}\mathbf{,}\mathbf{750}$

The book value of the computer equipment is $13,750.

(3) Computation of total asset turnover

Total asset turnover: - It measures a company’s ability to generate sales from its assets by comparing net sales with total assets.

$\mathit{t}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\mathit{t}\mathit{u}\mathit{r}\mathit{n}\mathit{o}\mathit{v}\mathit{e}\mathit{r}\mathbf{=}\frac{\mathbf{n}\mathbf{e}\mathbf{t}\mathbf{s}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}}{\mathbf{a}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{t}\mathbf{s}}$

$\mathit{t}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathit{r}\mathit{e}\mathit{v}\mathit{e}\mathit{n}\mathit{u}\mathit{e}\mathbf{=}\mathit{\$}\mathbf{44}\mathbf{,}\mathbf{000}$

$\mathit{a}\mathit{v}\mathit{e}\mathit{r}\mathit{a}\mathit{g}\mathit{e}\mathit{t}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\mathbf{=}\frac{\mathbf{83}\mathbf{,}\mathbf{460}\mathbf{+}\mathbf{120}\mathbf{,}\mathbf{268}}{\mathbf{2}}\mathbf{=}\mathit{\$}\mathbf{101}\mathbf{,}\mathbf{864}$

$\mathit{t}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\mathit{t}\mathit{u}\mathit{r}\mathit{n}\mathit{o}\mathit{v}\mathit{e}\mathit{r}\mathbf{=}\frac{\mathbf{44}\mathbf{,}\mathbf{000}}{\mathbf{101}\mathbf{,}\mathbf{864}}\mathbf{=}\mathbf{0}\mathbf{.43}$

The total asset turnover ratio is 0.43