Question

Exercise 23.6 Rate of return on stockholders’ equity. LO 23-1

CANNA, Inc. Comparative Income Statement Years Ended December 31, 2019 and 2018
	Amounts
	2019		2018
Sales	1,635,750		1,500,950
Less: Sales returns and allowances	96,750		82,950
Net sales	1,539,000		1,418,000
Cost of goods sold	1,066,300		992,600
Gross profit on sales	472,700		425,400
Selling expenses	215,000		205,000
General expenses	210,000		190,000
Total expenses	425,000		395,000
Net income before income taxes	47,700		30,400
Income tax expense	7,155		4,560
Net income after income taxes	40,545		25,840

  

CANNA, Inc. Comparative Balance Sheet December 31, 2019 and 2018
	2019		2018
Assets
Current Assets
Cash	124,540		112,250
Accounts receivable (Net)	135,750		107,000
Inventory	55,705		60,800
Total current assets	315,995		280,050
Property, Plant, and Equipment
Buildings (Net)	157,600		175,100
Equipment (Net)	65,950		63,850
Land	56,000		56,000
Total property, plant, and equipment	279,550		294,950
Total assets	595,545		575,000
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	155,000		160,000
Other current liabilities	40,000		45,000
Total current liabilities	195,000		205,000
Long-term Liabilities
Bonds payable	65,000		75,000
Total long-term liabilities	65,000		75,000
Total liabilities	260,000		280,000
Stockholders’ Equity
Common stock ($1 par)	200,000		200,000
Retained earnings	135,545		95,000
Total stockholders’ equity	335,545		295,000
Total liabilities and stockholders’ equity	595,545		575,000

Calculate the rate of net income on stockholders' equity for 2019 and 2018. Retained earnings on January 1, 2018, was $69,160. (Round your answers to the nearest dollar amount.)

	Choose Numerator	÷	Choose Denominator
				=	Rate of Return
2019		÷				%
2018

Answer 1

Ans.	Return on Common stockholder's equity =   Net income / Average Common stockholder's equity * 100
	2019	$40,545 / $315,272.50 *100		12.86%	or 13%
	2018	$25,840 / $282,080 * 100		9.16%	or 9%
	*Calculations:
		2018
	Common stock	$200,000
	Retained earnings	$69,160
	Beginning equity for 2018	$269,160
	* Average Stockholder's equity =   (Beginning equity + Ending equity) / 2
	2019	($295,000 + $335,545) / 2		$315,272.50
	2018	($269,160 + $295,000) / 2		$282,080