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 (Hint: Prepare an income statement and a balance sheet prior to completing the following requirements.)
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?
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