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

We can use the formula for rate of return on assets:
Rate of Return on Total Assets = Net Income / Average Total Assets
To calculate the average total assets, we take the total assets from both balance sheets and divide by 2:
($800,000 + $1,100,000) / 2 = $950,000
Using the numbers given, we can calculate the rate of return on total assets for Year 2:
Rate of Return on Total Assets = $150,000 / $950,000 = 0.1579 = 15.79%
But we also need to take into account the interest expense of $20,000. We subtract this from the net income before calculating the rate of return on total assets:
Rate of Return on Total Assets = ($150,000 - $20,000) / $950,000 = 0.1368 = 13.68%
Therefore, the answer is B) 11.9%.

The Balance Sheets at the End of Each of the First