Chapter 2: 26BP_c (page 83)

In January 2007, the Status Quo Company was formed. Total assets were $544,000, of which $306,000 consisted of depreciable fixed assets. Status
Quo uses straight-line depreciation of $30,600 per year, and in 2007 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been $29,000 per year each of the last 10 years. Other assets have not changed since 2007.
c. Now assume income increased by 10 percent each year. What effect would this have on your preceding answers? (A comment is all that is necessary.)

Short Answer

Expert verified

As the income of the company rises, return on assets will be higher than in Part ‘b’ and would indicates an increase in return partially from more profitable operations.

Step by step solution

Net Income of the company

Year	Net Income
2007	$29,000
2008	31,900 (29,000X110%)
2009	35,090 (31,900X110%)
2010	38,599 (35,090X110%)
2011	42,459 (35,599X110%)
2012	46,705 (42,459X110%)
2013	51,375 (46,705X110%)
2014	56,513 (51,375X110%)
2015	62,164 (56,513X110%)
2016	$68,380 (62,164X110%)

Return on assets for the year ending 2007, 2009, 2012, 2014, and 2016

Year	Net Income (a)	Total assets (b)	Return on assets (a/b)
2007	$29,000	$513,400	5.65%
2009	35,090	452,200	7.76%
2012	46,705	360,400	12.96%
2014	56,513	299,200	18.89%
2016	$68,380	$238,000	28.73%

Comparison of Return on assets computed in part a with part b

Year	Return on asset as per part a	Return on assets as per part b
2007	5.65%	5.65%
2009	6.41%	7.76%
2012	8.05%	12.96%
2014	9.69%	18.89%
2016	12.18%	28.73%

This table shows that the rate of increase in the return on assets after the increase in income is more than the increase in return on assets before the increase in income (i.e. in Part ‘a’).

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Retained earning	Bond payable
Accounts payable	Accrued wages payable
Prepaid expenses	Accounts receivable
Plant and equipment	Capital in excess of par
Inventory	Preferred stock
Common stock	Marketable security

Times mirror and glass company
Sales	\)126,000
Less: Cost of goods sold	93,000
Gross profit	\(33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\)18,000
Less: Interest expenses	3,000
Earning before taxes	\(15,000
Less: Taxes (30%)	4,500
Earning after taxes	\)10,500

Short Answer

Step by step solution

Net Income of the company

Return on assets for the year ending 2007, 2009, 2012, 2014, and 2016

Comparison of Return on assets computed in part a with part b

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