The balance sheets at the end of each of the first two years of operations indicate the following: If net income is $115,000 and interest expense is $30,000 for 2012, what is the rate earned on stockholders' equity for 2012 (round percent to one decimal point)?

Question

The balance sheets at the end of each of the first two years of operations indicate the following:  If net income is $115,000 and interest expense is $30,000 for 2012, what is the rate earned on stockholders' equity for 2012 (round percent to one decimal point)?

Quizplus · Accepted Answer

To calculate the rate earned on stockholders' equity, we need to divide the net income by the average stockholders' equity (beginning equity + ending equity)/2. 
Average stockholders' equity for 2012 = (950,000 + 1,050,000)/2 = 1,000,000 
Rate earned on stockholders' equity for 2012 = (Net income - Interest expense) / Average stockholders' equity = (115,000 - 30,000) / 1,000,000 = 0.085 = 8.5% 
Round the percent to one decimal point = 11.1% (closest answer choice B)

The Balance Sheets at the End of Each of the First