Question

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.

b. To what do you attribute the phenomenon shown in part a?

Short answer

The increasing return on assets over time is solely due to annual depreciation charges. This is because the annual depreciation charges reduce the amount of investment and the net income of the company is stable.

Step-by-step solution

Return on assets

The return on total asset is computed by dividing the net income by the total assets of the company.

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

The increase in annual depreciation is causing the decrease in the total assets of the company annually. As a result, the return on assets is increasing from 2007 through 2016.

Year	Net Income (a)	Total assets (b)	Return on assets (a/b)
2007	$29,000	$513,400	5.65%
2009	29,000	452,200	6.41%
2012	29,000	360,400	8.05%
2014	29,000	299,200	9.69%
2016	$29,000	$238,000	12.18%