Question

Return on Assets and SE

Duke Company Lord Company 2019 2020 2019 2020 Net sales Cost of goods sold Operating expenses Interest expense Income tax expense Current assets Plant assets (net) Current liabilities Long-term liabilities Common stock, $10 par Retained earnings $1,878,000 1,100,508 261,042 9,390 54,462 329,000 519,900 65,400 108,800 499,500 175,200 $312,100 501,200 74,800 90,400 499,500 148,600 $559,000 296,829 79,937 4,472 6,149 83,200 139,800 34,200 30,200 120,500 38,100 $78,300 124,200 29,600 26,000 120,500 26,400

the income statement is correct

Answer 1

(1) Return on assets (ROA) = Net income / Average total assets * 100

where, Average total assets = Beginning assets + Ending assets / 2

For Duke company:

So, Beginning assets = Assets in 2019 = Current assets + Plant assets (net)

Beginning assets = $312100 + $501200 = $813300

Ending assets = Assets in 2020 = Current assets + Plant assets (net)

Ending assets = $329000 + $519900 = $848900

Average assets = ($813300 + $848900) / 2 = $1662200 / 2 = $831100

Net income = $452598

Now, putting these values in the above ROA formula, we get,

Return on assets (ROA) = $452598 / $831100 * 100 = 54.5%

For Lord company:

So, Beginning assets = Assets in 2019 = Current assets + Plant assets (net)

Beginning assets = $78300 + $124200 = $202500

Ending assets = Assets in 2020 = Current assets + Plant assets (net)

Ending assets = $83200 + $139800 = $223000

Average assets = ($202500 + $223000) / 2 = $425500 / 2 = $212750

Net income = $171613

Now, putting these values in the above ROA formula, we get,

Return on assets (ROA) = $171613 / $212750 * 100 = 80.7%

(2) Return on common stockholder's equity = Net income / Average equity * 100

where, Average equity = Beginning equity + Ending equity / 2

For Duke company:

So, Beginning equity = Equity in 2019 = Common stock + Retained earnings

Beginning equity = $499500 + $148600 = $648100

Ending equity = Equity in 2020 = Common stock + Retained earnings

Ending equity = $499500 + $175200 = $674700

Average equity = ($648100 + $674700) / 2 = $1322800 / 2 = $661400

Net income = $452598

Now, putting these values in the above Return on equity formula, we get,

Return on common stockholder's equity = $452598 / $661400 * 100 = 68.4%

For Lord company:

So, Beginning equity = Equity in 2019 = Common stock + Retained earnings

Beginning equity = $120500 + $26400 = $146900

Ending equity = Equity in 2020 = Common stock + Retained earnings

Ending equity = $120500 + $38100 = $158600

Average equity = ($146900 + $158600) / 2 = $305500 / 2 = $152750

Net income = $171613

Now, putting these values in the above Return on equity formula, we get,

Return on common stockholder's equity = $171613 / $152750 * 100 = 112.3%