Wheeler Company reports the following amounts for 2014. The 2014 rate of return on ordinary shareholders' equity is

Question

Wheeler Company reports the following amounts for 2014.  The 2014 rate of return on ordinary shareholders' equity is

Quizplus · Accepted Answer

To find the rate of return on ordinary shareholders' equity, we need to divide the net income available to common shareholders by the average common equity. Net income available to common shareholders is $2,040,000 ($2,290,000 - $250,000 preferred dividends). Average common equity can be obtained by adding the beginning common equity to the ending common equity and dividing by 2. Beginning common equity is $9,000,000 and ending common equity is $10,000,000, so average common equity is $9,500,000 (($9,000,000 + $10,000,000) / 2). Dividing net income available to common shareholders by average common equity gives a rate of return on ordinary shareholders' equity of 21.47%. However, we need to adjust for the $300,000 gain on sale of equipment, which is not related to ordinary operations. Subtracting the gain on sale of equipment from net income available to common shareholders and recalculating gives a rate of return on ordinary shareholders' equity of 15.5% ($1,740,000 / $9,500,000). Therefore, the answer is B).

Wheeler Company Reports the Following Amounts for 2014