The following selected data were taken from the financial statements of Squiggle
ID: 2564967 • Letter: T
Question
The following selected data were taken from the financial statements of Squiggle Group Inc. for December 31, 2016, 2015 and 2014:
December 31 2016 2015 2014
Total assets $297,000, $268,000, $239,000
Notes payable (10% interest) 100,000 ,100,000 ,100,000
Common stock 40,000 , 40,000 , 40,000
Preferred 4% stock, $100 par 20,000 , 20,000 , 20,000 (no change during year)
Retained earnings 100,475 , 74,550 , 60,000
The 2016 net income was $26,725, and the 2015 net income was $15,350. No dividends on common stock were declared between 2014 and 2016.
a. Determine the rate earned on total assets, the rate earned on stockholders' equity, and the rate earned on common stockholders' equity for the years 2015 and 2016. When required, round to one decimal place.
a. 2016 b. 2015
INCLUDE DECIMALS
Rate earned on total assets a._____% b.______%
Rate earned on stockholders' equity a. _____% b. ____%
Rate earned on common stockholders' equity a. ____% b. _____%
Explanation / Answer
*Assuming we need to work on total assets not net assets(= Total assets – liablities)
RETURN ON TOTAL ASSETS = NET INCOME / AVERAGE OF TOTAL ASSETS AT THE END OF YEAR
a. For 2016:
Net Income = 26725
Average of Assets = ( Assets Balance 2016 + Assets Balance 2015) / 2 = 282500
Return on total assets = 26725 / 282500 = 0.0946 ~ 9.5%
Similarly,
b. For 2015:
Net Income = 15350
Average of Assets = (268000+239000) / 2 = 253500
Return on total assets = 15350 / 253500 = 0.06055 ~ 6.1%
RATE EARNED ON STOCKHOLDER’S EQUITY = NET INCOME / STOCKHOLDER’S EQUITY
Stockholder’s equity = Average of Total Assets – Liablities (Total Assets – Notes Payable)
For 2016:
Stockholder’s equity = ( (297000+268000) /2 ) – 100000 = 182500
Return of Shareholder’s Equity = 26725 / 182500 = 0.1464 ~ 14.6%
Similarly,
For 2015:
Stockholder’s equity = ((268000+239000)/2) – 100000 = 153500
Return of Shareholder’s Equity = 15350 / 153500 = 0.1 ~ 10.0%
RATE EARNED ON COMMON STOCKHOLDER’S EQUITY = (NET INCOME – PREFERRED DIVIDEND) / (AVERAGE COMMON STOCKHOLDER’s EQUITY)
Average common stockholder’s equity = Average of Common Stock+ Average of Retained Earnings
Preferred dividend = return of preferred dividend * Total Value of preffered stock
For 2016:
Average Common Stock = (40000 + 40000) / 2 = 40000
Average Retained earnings = (100475+ 74550) / 2 = 87512.5
Preferred Dividend = 4% of 20000 = 800
Rate earned on common stockholder’s equity = ( 26725- 800) / (40000 +87512.5) = 0.2033~ 20.3%
Similarly,
For 2015:
Average Common Stock = (40000 + 40000) / 2 = 40000
Average Retained earnings = (74550+60000) / 2 = 67275
Preferred Dividend = 4% of 20000 = 800
Rate earned on common stockholder’s equity = ( 15350 - 800) / (40000 +67275) = 0.1356~ 13.6%
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