Question

Calculating the Average Total Assets and the Return on Assets

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows. Also, assume a tax rate of 47%.

Somerville Company Income Statement For the Year Ended December 31, 20X2
	Amount		Percent
Net sales	$8,281,989		100.0%
Less: Cost of goods sold	(5,383,293)		65.0
Gross margin	$2,898,696		35.0
Less: Operating expenses	(1,323,368)		16.0
Operating income	$1,575,328		19.0
Less: Interest expense	(50,000)		0.6
Income before taxes	$1,525,328		18.4
Less: Income taxes (47%)*	(716,904)		8.6
Net income	$808,424		9.8
* Includes both state and federal taxes.

Somerville Company Statement of Retained Earnings For the Year Ended December 31, 20X2
Balance, beginning of period	$1,979,155
Net income	$808,424
Total	$2,787,579
Preferred dividends	(80,000)
Dividends to common stockholders	(201,887)
Balance, end of period	$2,505,692

Somerville Company Comparative Balance Sheets At December 31, 20X1 and 20X2
	20X1		20X2
Assets
Current assets:
Cash	$2,875,000		$2,580,000
Marketable securities	800,000		700,000
Accounts receivable (net)	939,776		690,000
Inventories	490,000		260,000
Other	93,000		74,261
Total current assets	$5,197,776		$4,304,261
Property and equipment:
Land	$1,575,000		$1,067,315
Building and equipment (net)	1,348,800		1,150,000
Total long-term assets	$2,923,800		$2,217,315
Total assets	$8,121,576		$6,521,576
Liabilities and stockholders' equity
Current liabilities:
Notes payable, short term	$1,170,127		$ 543,641
Accounts payable	405,257		101,500
Current maturity of long-term debt	3,000		2,000
Accrued payables	200,000		57,780
Total current liabilities	$1,778,384		$ 704,921
Long-term liabilities:
Bonds payable, 10%	500,000		500,000
Total liabilities	$2,278,384		$1,204,921
Stockholders' equity:
Preferred stock, $25 par, 8%	$1,000,000		$1,000,000
Common stock, $1.50 par	337,500		337,500
Additional paid-in capital*	2,000,000		2,000,000
Retained earnings	2,505,692		1,979,155
Total stockholders' equity	$5,843,192		$5,316,655
Total liabilities and stockholders' equity	$8,121,576		$6,521,576
* For common stock only.

Required:

Note: Round the return on total assets to two decimal places.

1. Calculate the average total assets.
$

2. Calculate the return on total assets.
%

Answer 1

a.

Average total assets

$ 73,21,576

Working:

Average total assets

=

(Beginning of the year total assets + End of the year total assets)/2

=

(8121576+6521576)/2

=

$       73,21,576

b.

Return on total assets

11.04%

Working:

Return on total assets

=

Net Income/Average total assets

=

$       8,08,424

/

$ 73,21,576

=

11.04%