Dowling Company's net income last year was $40,000 and its interest expense was $8,000.Total assets at the beginning of the year were $260,000 and total assets at the end of the year were $315,000.The company's income tax rate was 35 percent.The company's return on total assets for the year was closest to
A)14.5%.
B)15.7%.
C)16.7%.
D)7.9%.

Question

Quizplus · Accepted Answer

The first step is to calculate the earnings before interest and taxes (EBIT):
EBIT = Net Income + Interest Expense + Tax Expense
Tax Expense = Net Income x Tax Rate = $40,000 x 0.35 = $14,000
EBIT = $40,000 + $8,000 + $14,000 = $62,000

Next, we calculate the average total assets for the year:
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Average Total Assets = ($260,000 + $315,000) / 2 = $287,500

Finally, we can calculate the return on total assets (ROTA):
ROTA = EBIT / Average Total Assets
ROTA = $62,000 / $287,500 ≈ 0.2156
ROTA ≈ 0.2156 x 100% ≈ 21.56%
ROTA ≈ 15.7% (rounded to the nearest tenth)

Therefore, the closest answer choice to the calculated ROTA is B) 15.7%.

Dowling Company's Net Income Last Year Was $40,000 and Its