The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:
Somerville Company
Income Statement
For the Year Ended December 31, 2016 |
| |
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 |
| Income before taxes |
$1,525,328 |
|
18.4 |
| Less: Income taxes (40%)* |
(610,131) |
|
7.4 |
| Net income |
$ 915,197 |
|
11.0 |
| * Includes both state and federal taxes. |
|
|
|
Somerville Company
Statement of Retained Earnings
For the Year Ended December 31, 2016 |
| Balance, beginning of period |
$1,979,155 |
| Net income |
915,197 |
| Total |
$2,894,352 |
| Less: Preferred dividends |
(80,000) |
| Dividends to common stockholders |
(201,887) |
| Balance, end of period |
$2,612,465 |
Somerville Company
Comparative Balance Sheets
At December 31, 2015 and 2016 |
| |
2015 |
|
2016 |
| 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 and equipment: |
| 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 and Stockholders' Equity |
| Current liabilities: |
| Notes payable, short term |
$1,170,127 |
|
$ 543,641 |
| Accounts payable |
298,484 |
|
101,500 |
| Current maturity of long-term debt |
3,000 |
|
2,000 |
| Accrued payables |
200,000 |
|
57,780 |
| Total current liabilities |
$1,671,611 |
|
$ 704,921 |
| Long-term liabilities: |
| Bonds payable, 10% |
500,000 |
|
500,000 |
| Total liabilities |
$2,171,611 |
|
$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 |
2,612,465 |
|
1,979,155 |
| Total stockholders' equity |
$5,949,965 |
|
$5,316,655 |
| Total liabilities and stockholders' equity |
$8,121,576 |
|
$6,521,576 |
| * For common stock only. |
|
|
|
Required:
Note: Round the return on stockholder's equity to two decimal places.
1. Calculate the average common stockholders' equity.
2. Calculate the return on stockholders' equity.