Cecilia Company reported net income of $1,200,000. The average total liabilities were $4,300,000 and average total stockholders' equity was $5,200,000. Interest expense was $100,000 and the tax rate was 40%. Cecilia's return on assets ratio is closest to:
A) 13.7%
B) 12.6%
C)11.6%
D)13.3%

Question

Quizplus · Accepted Answer

Return on assets (ROA) is calculated as net income divided by average total assets.

First, we need to calculate the average total assets:

Average total assets = (Beginning total assets + Ending total assets) / 2

We don't have the beginning and ending total assets, but we can use the formula:

Average total assets = Average total liabilities + Average total stockholders' equity

Average total assets = $4,300,000 + $5,200,000 = $9,500,000

Now we can calculate ROA:

ROA = Net income / Average total assets

ROA = $1,200,000 / $9,500,000

ROA = 0.1263 or 12.63%

However, we need to adjust for interest expense and taxes.

After-tax interest expense = Interest expense x (1 - Tax rate)

After-tax interest expense = $100,000 x (1 - 0.4)

After-tax interest expense = $60,000

Adjusted net income = Net income - After-tax interest expense

Adjusted net income = $1,200,000 - $60,000

Adjusted net income = $1,140,000

ROA with adjustments = Adjusted net income / Average total assets

ROA with adjustments = $1,140,000 / $9,500,000

ROA with adjustments = 0.1200 or 12.00%

Therefore, the closest answer is D) 13.3%, which is the closest to the original calculation of 12.63% before adjusting for interest expense and taxes.

Cecilia Company Reported Net Income of $1,200,000