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Chapter 10: 5TI (page 561)

Lee Co. reported the following items on its 2018 financial statements:

Total Assets, December 31, 2018

$10,000

Total Assets, December 31, 2017

15,000

For year ended December 31, 2018

Interest Expenses

150

Net income

850

Determine Lee’s rate of return on total assets for 2018.

Short Answer

Expert verified

Return on total assets is8%.

Step by step solution

01

Definition of Rate of Return

Gain generated or loss incurred by holding an investment over time reflected in percentage is known as the rate of return.

02

Rate of Return on Total Assets

Returnontotalassets=Netincome+InterestexpenseAveragetotalassets×100=$850+$150$10,000+$15,0002×100=$1,000$12,500×100=8%

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Most popular questions from this chapter

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

3. Prepare T-accounts for the investment assets, and show how to report the investments on Captain Transfer’s balance sheet at December 31, 2018.

Question: S10-7 Computing rate of return on total assets

Barot’s 2018 financial statements reported the following items—with 2017 figures given for comparison:

BAROT INC

Balance Sheet

As of December 31, 2018 and 2017

2018

2017

Total assets

\(32,978

\)30,660

Total liabilities

19,400

11,560

Total stockholder’s equity

13,578

19,100

Total liabilities and stockholder’s equity

\(32,978

\)30,660

Net income for 2018 was \(3,910, and interest expense was \)240. Compute Barot’s rate of return on total assets for 2018. (Round to the nearest percent.)

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

1. Journalize any required 2018 entries for the bond investment.

Accounting for equity investments

Captain Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 200 shares of Velcon stock, paying \(53 per share. The investment represents 4% ownership in Velcon’s voting stock. Captain does not have significant influence over Velcon. Captain intends to hold the investment for the indefinite future.

Aug. 22 Received a cash dividend of \)0.28 per share on the Velcon stock.

Dec. 31 Adjusted the Velcon investment to its current market value of $58.

Requirements

Journalize the entries for 2018. Explanations are not required.

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets’ fair values.

Requirements

If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?
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