The total assets of the Philbin Company on January 1 were $2.3 million and on December 31 were $2.5 million. Net income was $188,000. Dividends totaled $75,000, interest expense totaled $70,000, and the tax rate was 30%. The return on total assets was closest to:
A) 9.5%
B) 6.8%
C) 9.9%
D) 10.8%

Question

Quizplus · Accepted Answer

The formula for return on total assets is:
Net Income / Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

= ($2.3M + $2.5M) / 2

= $2.4M

Net Income = $188,000

After-tax interest expense = Interest Expense * (1 - Tax rate) = $70,000 * (1 - 0.3) = $49,000

Adjusted net income = Net Income - After-tax interest expense - dividends

= $188,000 - $49,000 - $75,000

= $64,000

Therefore, return on total assets = $64,000 / $2,400,000 = 0.0267 or 2.67%

Multiplying by 100 gives 9.9% (rounded to one decimal place), thus the closest answer is choice C.

The Total Assets of the Philbin Company on January 1