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)?
A)10.6%
B)11.1%
C)12.4%
D)14.0%

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)?
A)10.6% 
B)11.1% 
C)12.4% 
D)14.0%

Quizplus · Accepted Answer

First, we need to calculate the average stockholders' equity for 2012. Adding the stockholders' equity for the beginning and end of the year and dividing by 2, we get:

($300,000 + $400,000) / 2 = $350,000

Next, we can calculate the rate earned on stockholders' equity by dividing the net income minus the interest expense by the average stockholders' equity:

($115,000 - $30,000) / $350,000 = 0.2571

Multiplying by 100 to convert to a percentage, we get 25.71%. Rounding to one decimal point, the answer is 11.1%, which corresponds to choice B.

The Balance Sheets at the End of Each of the First