Business Applications Case Effect of depreciation on the return on assets ratio
Campus Video Games (CVG) was started on January 1, 2010, when it acquired $62,500 cash from the issue of common stock. The company immediately purchased video games that cost $62,500 cash. The games had an estimated salvage value of $7,500 and an expected useful life of five years. CVG used the games during 2010 to produce $25,000 of cash revenue. Assume that these were the only events affecting CVG during 2010.
Required
a. Compute the return on assets ratio as of December 31, 2010, assuming CVG uses the straight line depreciation method.
b. Recompute the ratio assuming CVG uses the double declining balance method.
c. Which depreciation method makes it appear that CVG is utilizing its assets more effectively?