Your Firm Requires an Average Accounting Return (AAR)of at Least

question 43

Multiple Choice

Your firm requires an average accounting return (AAR) of at least 15 per cent on all fixed Asset purchases.Currently,you are considering some new equipment costing $96 000.This equipment will have a three-year life over which time it will be depreciated on a straight line basis to a zero book value.The annual net income from this project is estimated at $5500,$12 400,and $17 600 for the three years.Should you accept this project based on the accounting rate of return? Why or why not?

• A)yes;because the AAR is less than 15 per cent
• B)yes;because the AAR is equal to 15 per cent
• C)yes;because the AAR is greater than 15 per cent
• D)no;because the AAR is less than 15 per cent
• E)no;because the AAR is equal to 15 per cent

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Definitions:

Reversing Entry

An accounting technique used to simplify record-keeping, where an entry made in one accounting period is reversed in the next period to allow for straightforward transaction recording.

Adjusting Journal Entry

A journal entry made at the end of an accounting period to record any unrecorded income or expenses for that period, ensuring that financial statements adhere to the accrual basis of accounting.

Revenue Account

An account that tracks the income earned from normal business operations.

Expense Account

An income statement account that represents the cost of goods sold, operating expenses, and non-operating expenses.