In January 2001 the Status Quo Company was formed. Total assets were $552,000, o

Question

In January 2001 the Status Quo Company was formed. Total assets were $552,000, of which $370,000 consisted of depreciable fixed assets. Status Quo uses straight-line depreciation of $37,000 per year, and in 2001 it estimated its fixed assets to have useful lives of 10 years. Aftertax income has been $36,000 per year each of the last 10 years. Other assets have not changed since 2001.

(a) Compute return on assets at year-end for 2001, 2003, 2006, 2008, and 2010. (Use $36,000 in the numerator for each year.) (Round your answers to 2 decimal places. Omit the "%" sign in your response.) Year Return on assets 2001 % 2003 % 2006 % 2008 % 2010 %

(b) To what do you attribute the phenomenon shown in part a? Annual depreciation charges Increase in market share Increase in current assets Increase in return on assets (c) Now assume income increased by 10 percent each year. What effect would this have on your above answers?

Return on assets will be .

Explanation / Answer

Answer a 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Variable assets $        370,000 $        333,000 $        296,000 $        259,000 $        222,000 $        185,000 $        148,000 $        111,000 $          74,000 $          37,000 Fixed assets $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 Total assets $        552,000 $        515,000 $        478,000 $        441,000 $        404,000 $        367,000 $        330,000 $        293,000 $        256,000 $        219,000 After tax income $          36,000 $          36,000 $          36,000 $          36,000 $          36,000 $          36,000 $          36,000 $          36,000 $          36,000 $          36,000 Return on assets 6.52% 7.53% 9.81% 12.29% 16.44% Answert b: The phenomenon is due to annual depreciation charges which reduces the value of assets and hence increases the return on assets when returns remain constant Answer c 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Variable assets $        370,000 $        333,000 $        296,000 $        259,000 $        222,000 $        185,000 $        148,000 $        111,000 $          74,000 $          37,000 Fixed assets $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 $        182,000 Total assets $        552,000 $        515,000 $        478,000 $        441,000 $        404,000 $        367,000 $        330,000 $        293,000 $        256,000 $        219,000 After tax income $    36,000.00 $    39,600.00 $    43,560.00 $    47,916.00 $    52,707.60 $    57,978.36 $    63,776.20 $    70,153.82 $    77,169.20 $    84,886.12 Return on assets 6.52% 9.11% 15.80% 23.94% 38.76% Hence, the phenomenon is the combined effort of increase in returns as well as depreciation of assets

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