Bisbee Health ucts inves heavily in rese and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Bisbee evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R&D expenditures are capitalized and then amortized over two years. Western Division of Bisbee shows after-tax income of $8.4 million for year 2. R&D expenditures in year 1 amounted to $3.8 million and in year 2, R&D expenditures were $4.9 million. For purposes of computing EVA, Bisbee assumes all R&D expenditures are made at the beginning of the year. Before adjusting for R&D, Western Division shows assets of $30.6 million at the beginning of year 2 and current liabilities of $680,000. Bisbee computes EVA using divisional investment at the beginning of the year and a 14 percent cost of capital. Required: Compute EVA for Western Division for year 2. (Enter your answers in dollars, not in millions.) Adjusted divisional income Cost of adjusted divisional investment Economic value added (EVA)

Bisbee Health ucts inves heavily in rese and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Bisbee evaluates its division managers using EVA. The company adjusts accounting income for R&D expenditures by assuming these expenditures create assets with a two-year life. That is, the R&D expenditures are capitalized and then amortized over two years. Western Division of Bisbee shows after-tax income of $8.4 million for year 2. R&D expenditures in year 1 amounted to $3.8 million and in year 2, R&D expenditures were $4.9 million. For purposes of computing EVA, Bisbee assumes all R&D expenditures are made at the beginning of the year. Before adjusting for R&D, Western Division shows assets of $30.6 million at the beginning of year 2 and current liabilities of $680,000. Bisbee computes EVA using divisional investment at the beginning of the year and a 14 percent cost of capital. Required: Compute EVA for Western Division for year 2. (Enter your answers in dollars, not in millions.) Adjusted divisional income Cost of adjusted divisional investment Economic value added (EVA)

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter12: Auditing Long-lived Assets And Merger And Acquisition Activity

Section: Chapter Questions

Problem 17RQSC

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