Objective 23.3

 

Answer the following questions using the information below:

 

Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2015:

 

	ASSETS		INCOME
	Book value	Current value	Book value	Current value
Bleach	$275,000	$300,000	$125,000	$150,000
Cleanser	$400,000	$350,000	$100,000	$115,000

 

The company is currently using a 15% required rate of return.

 

1) What are Bleach's and Cleanser's return on investment based on book values, respectively?

A) 0.25; 0.67

B) 0.42; 0.52

C) 0.52; 0.47

D) 0.46; 0.25

 

2) What are Bleach's and Cleanser's return on investment based on current values, respectively?

A) 0.22; 0.6749

B) 0.42; 0.5219

C) 0.50; 0.3286

D) 0.67; 0.2286

3) What are Bleach's and Cleanser's residual incomes based on book values, respectively?

A) $83,750; $40,000 

B) $110,000; $67,500

C) $67,500; $110,000

D) $81,500; $40,250

 

Answer the following questions using the information below:

 

Carriage Incorporated manufactures horse 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 2015:

 

	ASSETS		INCOME
	Book value	Current value	Book value	Current value
Wheels	$485,000	$550,000	$120,000	$140,000
Assembly	$750,000	$1,200,000	$160,000	$172,500

 

The company is currently using a 12% required rate of return.

 

4) 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; 0.25

D) 0.25; 0.14

 

5) 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; 0.25

D) 0.25; 0.14

6) 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

 

7) The cost today of purchasing an asset identical to the one currently held is called a(n) ________.

A) actual cost

B) current cost

C) prime cost

D) variable cost

 

8) The proponents of using net book value as an investment base maintain that it is less confusing because  it is consistent with the amount of total assets shown in the conventional balance sheet.

 

9) Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment.

 

10) The net present value of all cash flows over the life of an investment equals the net present value of the

residual incomes.