Question

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? 11.9% 8.4% 10.5% 10.4%

Answer 1

The return on total assets is calculated as -

Return on total assets = (Net income + Interest expense) / Average total assets

Average total assets = (Total assets of year 1 + Total assets of year 2) / 2

Average total assets =( ($ 600,000 + $ 60000 + $ 900,000) + ( 560,000 + $ 40000 + $ 700000) ) /2

Average total assets = $ 1,430,000

Return on Total assets = ( $ 150,000 + $ 20,000) / $ 1,430,000

Return on Total assets = 11.9%