38E - Horngren'S Financial And Managerial Accounting

Question

Computing rate of return on common stockholders’ equity

LaSalle Exploration Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 14,800 \) 19,200

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 323,000 \) 314,000

Preferred Stock \( 2,100 \) 2,100

Common Stock 178,000 168,000

Retained Earnings 11,000 7,000

Total Stockholders’ Equity \( 191,100 \) 177,100

Compute rate of return on common stockholders’ equity for 2018 assuming no dividends were declared or paid to preferred stockholders

Step-by-Step Solution

Answer

Rate of return on common stockholders’ equity for 2018 is 8.55%

Step 1: Basic Introduction-

Return on common stockholders' equity estimates the success of a corporation in generating revenue for the benefit of common stockholders.

Step 2: Calculation of rate of return on common stockholder’s equity

Rate of return on common stockholders’ equity
Net Income	$ 14,800
Preferred dividends	0
a.	$ 14,800
b. Average common equity	$173,000
(a/b)* 100	8.55%