Use this balance sheet and income statement for the first year of operations for Layton Novelties,Inc.to answer the following question.Use ending balances whenever average balances are required for computing ratios. The return on equity for Layton Novelties is
A) 48 percent.
B) 21.6 percent.
C) 42 percent.
D) 30 percent.

Question

Use this balance sheet and income statement for the first year of operations for Layton Novelties,Inc.to answer the following question.Use ending balances whenever average balances are required for computing ratios.   The return on equity for Layton Novelties is
A) 48 percent. 
B) 21.6 percent. 
C) 42 percent. 
D) 30 percent.

Quizplus · Accepted Answer

To calculate the return on equity, we need to divide the net income by the average shareholder's equity. The net income for the first year is $86,000, and the shareholder's equity at the beginning of the year is $200,000, and at the end of the year is $250,000, so the average shareholder's equity is ($200,000+$250,000)/2 = $225,000. Therefore, the return on equity for Layton Novelties is ($86,000/$225,000) x 100 = 38.22%. Therefore, the best choice is B, which is 21.6 percent (because 38.22% is not an option).

Use This Balance Sheet and Income Statement for the First