The first eleven questions on the exam will deal with the following balance shee

Question

The first eleven questions on the exam will deal with the following balance sheet for Cipher Bank. It will be repeated in future questions to make things a bit easier. Note that you can, and may have to, calculate anything marked with a "???," and anything not included or otherwise calculable - $0 Assets Liabilities and Owner's Equity Buildings and furniture $900 Cash $80 Commercial paper $500 Deposit in the Fed $320 Government agency bonds $800 Home mortgages $1200 Loan to Bank A $400 Loans to firms $1100 Loans to households $1300 Municipal bonds $1400 US government bonds $600 Checking deposits $2100 Savings deposits $800 Time deposits $200 Borrowing from Bank B $500 Borrowing from the Fed $1600 Other liabilities $1000 Equity $??? Total assets = $8600 Total liabilities and owner's equity???

Explanation / Answer

Step.1= First of all we have to find owners equity by using given below method:-

owners equity = Total assets - ( all liabilities except owners equity)

= $ 8600 - $ (2100+800+200+500+1600+1000)

= $ 2400

Step-2= We have to find net income of bank as follows:-

= Net income = Gross income - Expenses

Therefore first we have to find gross income as follows:-

Gross income = interest income + non-interest income

= $240 + $20

= $260

Expenses = interest expenses + non-interest expenses

= $50 + $80

= $ 130

Now calculate net income as follows:-

Net income = Gross income - Expenses

= $260 - $130

= $130

Step.3= calculate average total bank assets as follows:-

formula = (previous year assets + following year assets) / 2

Previous year total assets = $ 8600 (as per given in question)

Following year total assets = $8600 - {Non-performing assets (household loans) }

= $ 8600 - ( $1300 * 20%)

= $ 8600 - $ 260

= $ 8340

Average total assets = ($8600 + $8340) / 2

= $ 8470

Step 4= calculate return on asstes as follows:-

ROA = Net income / Average assets * 100

= $ 130 / $ 8470 * 100

= 1.53 percent

Note:- 1. We have deducted non-performing assets because from next year it will not consider as assets.

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