Question

3a. Resilient Company had sales of $100,000, operating income of $15,000 and net income of $10,000 in 2017. Total assets amounted to 180,000 at the beginning of 2017 and 220,000 at the end of the year. Total stockholders’ equity amounted to $45,000 at the beginning of 2017 and $55,000 at the end of 2017. Using the DuPont formula, calculate the return on investment for Resilient in 2017. Calculate return of stockholders’ equity for 2017.

3b. Volume Company sold for $950,000 bonds that had a face (maturity) value of $1,000,000 on June 1, 2017. The bonds had a 5 year term with a maturity date of May 31, 2022. The annual interest rate on the bonds is 12 percent which is paid semiannually each November 30 and May 31. What entries should Volume Company make on issuance of the bond on June 1, 2017, on payment of interest on November 30, 2017 and on the accrual of interest on December 31, 2017?

Answer 1

Solution 3a:

Net Profit margin = Net Income / Sales = $10,000 / $100,000 = 10%

Average Total assets = ($180,000 + $220,000)/2 = $200,000

Asset turnover = Sales / Average total assets = $100,000 / $200,000 = 0.50

Return on investment = Profit margin * Asset turnover = 10% * 0.5 = 5%

Equity Multiplier = Average total assets / Average stockholder's equity

Average stockholder's equity = ($45,000 + $55,000)/2 = $50,000

Equity multiplier = $200,000 / $50,000 = 4

Return on stockholder's equity = Net Profit margin * Asset turnover * Equity multiplier

= 10% * 0.5 * 4 = 20%

Solution 3b:

Journal Entries - Volume Company
Date	Particulars	Debit	Credit
1-Jun-17	Cash Dr	$950,000.00
	Discount on issue of bond Dr	$50,000.00
	To Bond Payable		$1,000,000.00
	(To record issue of bond)
30-Nov-17	Interest expense Dr	$65,000.00
	To Discount on issue of bond ($50,000/10)		$5,000.00
	To Cash		$60,000.00
	(To record interest payment and discount amortization)
31-Dec-17	Interest expense Dr	$10,833.00
	To Discount on issue of bond ($50,000/5*1/12)		$833.00
	To Cash ($1,000,000*12%*1/12)		$10,000.00
	(To record interest expense accured and discount amortized)