Jakarta Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2021. The following information is available for the company for 2020 and 2021. 2021 2020 Net income $120,000 $100,000 Average stockholders' equity 1,000,000 800,000 Total assets 1,200,000 1,200,000 Current liabilities 100,000 100,000 Total liabilities 360,000 480,000 Instructions (1) Compute the return on common stockholders' equity for both years. (2) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased. (3) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency.
Jakarta Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2021. The following information is available for the company for 2020 and 2021. 2021 2020 Net income $120,000 $100,000 Average stockholders' equity 1,000,000 800,000 Total assets 1,200,000 1,200,000 Current liabilities 100,000 100,000 Total liabilities 360,000 480,000 Instructions (1) Compute the return on common stockholders' equity for both years. (2) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased. (3) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Jakarta Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2021. The following information is available for the company for 2020 and 2021.
| 2021 | 2020 | |
| Net income | $120,000 | $100,000 |
| Average |
1,000,000 | 800,000 |
| Total assets | 1,200,000 | 1,200,000 |
| Current liabilities | 100,000 | 100,000 |
| Total liabilities | 360,000 | 480,000 |
Instructions
(1) Compute the return on common stockholders' equity for both years.
(2) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased.
(3) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency.
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