The following information pertains to Dallas Company.Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit.

What is the rate earned on stockholders’ equity?
A) 7.3%
B) 13.6%
C) 20.5%
D) 40.9%

Question

The following information pertains to Dallas Company.Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit.

What is the rate earned on stockholders’ equity?
A) 7.3% 
B) 13.6% 
C) 20.5% 
D) 40.9%

Quizplus · Accepted Answer

First, we need to calculate the company's net income:
Net income = Sales - Cost of goods sold - Operating expenses - Interest expense
= $1,450,000 - $920,000 - $325,000 - $40,000
= $165,000

Next, we need to calculate the average stockholders' equity:
Average stockholders' equity = (Beginning stockholders' equity + Ending stockholders' equity) / 2
= ($550,000 + $700,000) / 2
= $625,000

Finally, we can calculate the rate earned on stockholders' equity:
Rate earned on stockholders' equity = Net income / Average stockholders' equity
= $165,000 / $625,000
= 0.264
= 26.4%

Since the question only gives answer choices as percentages, we need to convert our answer to a percentage:
Rate earned on stockholders' equity = 26.4%
The closest answer choice is B, 13.6%, which is incorrect. The correct answer is C, 20.5%.

The Following Information Pertains to Dallas Company