Question

Use this information for Kellman Company to answer the question that follow. The balance sheets at the end of each of the first two years of operations indicate the following: Kellman Company Year 2 Year 1 Total current assets $600,000 $560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 125,000 65,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, $100 par 100,000 100,000 Common stock, $10 par 600,000 600,000 Paid-in capital in excess of par—Common stock 75,000 75,000 Retained earnings 310,000 210,000 Using the balance sheets for Kellman Company, if net income is $150,000 and interest expense is $20,000 for Year 2, what is the return on total assets for the year? a.11.9% b.10.4% c.8.4% d.10.5%

Answer 1

Answer:

a.11.9%

Explanation:

The formula to compute the net income is shown below:

Return on assets = (Net income + interest expense) ÷ (average total assets)

where,

Average total assets = (Year 2 current assets + Year 2 Total investments + Year 2 Total property, plant, and equipment) + (Year 1 current assets + Year 1 Total investments + Year 1 Total property, plant, and equipment) ÷ 2

= ($600,000 + $60,000 + $900,000) + ($560,000 + $40,000 + $700,000) ÷ 2

= $2,860,000 ÷ 2

= $1,430,000

And the other items values would remain the same

Now put these values to the above formula  

So, the ratio would equal to

= ($150,000 + $20,000) ÷ $(1,400,000)

= $170,000 ÷ $1,430,000

= 11.89%