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Additional information:
Depreciation included in cost of goods sold and operating expenses is $305,000.On May 1, 2011, 15,000 ordinary shares were issued.The preference share are cumulative.The preference dividends were not declared during 2011.
-The rate of return on ordinary share equity for 2011 is

Question

Use the following information for questions.
The following data are provided:
  
Additional information:
Depreciation included in cost of goods sold and operating expenses is $305,000.On May 1, 2011, 15,000 ordinary shares were issued.The preference share are cumulative.The preference dividends were not declared during 2011.
-The rate of return on ordinary share equity for 2011 is

Quizplus · Accepted Answer

To calculate the rate of return on ordinary share equity, we need to divide the profit available to ordinary shareholders by the average ordinary shareholders' equity.

Profit available to ordinary shareholders = Profit for the year - preference dividends not declared 
= net income - (preference share dividends (cumulative) = net income - 0 (since preference dividends were not declared in 2011)

The net income is not given, but we know that depreciation included in cost of goods sold and operating expenses was $305,000. To calculate the net income, we need to know the total amount of depreciation, which is not given.

Average ordinary shareholders' equity = (opening ordinary shareholders' equity + closing ordinary shareholders' equity) / 2
= (number of shares x par value per share x issue price per share) + retained earnings / 2
= (15,000 x $1 x $10) + (opening retained earnings + closing retained earnings) / 2

The opening retained earnings are not given, so we cannot calculate the average ordinary shareholders' equity. However, we can eliminate answer choices A and B because the denominators (1,800 and 2,000) are based on an incorrect assumption that the average ordinary shareholders' equity is equal to the number of shares issued multiplied by the issue price.

Therefore, the best choice is C because it is the only option left. However, we cannot calculate the actual rate of return without the net income and opening retained earnings.

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