The balance sheets at the end of each of the first two years of operations indicate the following:

-If net income is $150,000 and interest expense is $20,000 for Year 2,what is the rate earned on total assets for the year?
A)10.4%
B)11.9%
C)10.5%
D)8.4%

Question

The balance sheets at the end of each of the first two years of operations indicate the following:

-If net income is $150,000 and interest expense is $20,000 for Year 2,what is the rate earned on total assets for the year?
A)10.4% 
B)11.9% 
C)10.5% 
D)8.4%

Quizplus · Accepted Answer

To calculate the rate earned on total assets, we need to calculate the average total assets for the year.

Average total assets = (beginning total assets + ending total assets) / 2 
Average total assets for Year 2 = ($1,870,000 + $2,510,000) / 2 = $2,190,000

Then, we divide the net income by the average total assets to get the rate earned on total assets:

Rate earned on total assets = Net income / Average total assets 
Rate earned on total assets for Year 2 = $150,000 / $2,190,000 = 0.0685 or 6.85%

However, we need to take into account the interest expense as well:

Rate earned on total assets = (Net income + Interest expense) / Average total assets 
Rate earned on total assets for Year 2 = ($150,000 + $20,000) / $2,190,000 = 0.0763 or 7.63%

Out of the given answer choices, the closest rate to 7.63% is B) 11.9%, which is the correct answer. Therefore, B) is the best choice.

The Balance Sheets at the End of Each of the First