Calculating the Average Total Assets and the Return onAssets
The income statement, statement of retained earnings, andbalance sheet for Somerville Company are as follows. Also, assume atax rate of 48%.
SomervilleCompanyIncome StatementFor the Year Ended December 31, 2014
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
Netincome before taxes
$1,525,328
18.4
Less: Taxes (48%)*
(732,157)
8.8
Netincome
$793,171
9.6
* Includes both stateand federal taxes.
SomervilleCompanyStatement of Retained EarningsFor the Year Ended December 31, 2014
Balance, beginning of period
$1,979,155
Net income
$793,171
Total
$2,772,326
Less: Preferred dividends
(80,000)
Dividends to commonstockholders
(201,887)
Balance, end of period
$2,490,439
SomervilleCompanyComparative Balance SheetsAt December 31, 2013 and 2014
2013
2014
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 andequipment:
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 andstockholders’ equity
Currentliabilities:
Notes payable, short term
$1,170,127
$ 543,641
Accounts payable
420,510
101,500
Current maturity of long-termdebt
3,000
2,000
Accrued payables
200,000
57,780
Total current liabilities
$1,793,637
$ 704,921
Long-termliabilities:
Bonds payable, 10%
500,000
500,000
Total liabilities
$2,293,637
$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
2,490,439
1,979,155
Total equity
$5,827,939
$5,316,655
Total liabilities and stockholders’equity
$8,121,576
$6,521,576
* For common stock only.
Required:
Note: Round the return on total assets to two decimalplaces.
1. Calculate the average total assets.$
2. Calculate the return on total assets.%
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