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AccountingManagerial Accounting: The Cornerstone of Business Decision-Making7th Edition
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The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows: * Includes both state and federal taxes. Brief Exercise 15-20 Calculating the Average Common Stockholders’ Equity and the Return on Stockholders’ Equity Refer to the information for Somerville Company on the previous pages. Required: Note: Round answers to four decimal places. 1. Calculate the average common stockholders’ equity. 2. Calculate the return on stockholders’ equity.

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773

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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
Publisher: Cengage Learning
ISBN: 9781337115773
Chapter 15, Problem 20BEA
Textbook Problem
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The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows:

Chapter 15, Problem 20BEA, The income statement, statement of retained earnings, and balance sheet for Somerville Company are , example 1

*Includes both state and federal taxes.

Chapter 15, Problem 20BEA, The income statement, statement of retained earnings, and balance sheet for Somerville Company are , example 2

Chapter 15, Problem 20BEA, The income statement, statement of retained earnings, and balance sheet for Somerville Company are , example 3

Brief Exercise 15-20 Calculating the Average Common Stockholders’ Equity and the Return on Stockholders’ Equity

Refer to the information for Somerville Company on the previous pages.

Required:

Note: Round answers to four decimal places.

  1. 1. Calculate the average common stockholders’ equity.
  2. 2. Calculate the return on stockholders’ equity.

1.

To determine

Compute the value of average common stockholder’s equity.

Explanation of Solution

Return on Stockholder’s Equity:

Return on stockholder’s equity is a metric that compares one measure of return with other measure of returns. It is calculated by dividing the remainder of net income and preference dividend by the average common stockholder’s equity.

Use the following formula to calculate the value of average common stockholder’s equity:

Average Common Stockholder's Equity=[(Stockholder's Equity for 20X11+Stockholder's Equity for 20X22)2]

Substitute $4,949,965 for stockholder’s equity for 20X1 and $4,316,655 for stockholder’s equity for 20X2 in the above formula.

Average Common Stockholder's Equity=$4,949,965+$4,316,6552=$4,633,310

Therefore, the value of average common stockholder’s equity is $4,633,310

2.

To determine

Compute the value of return on stockholder’s equity.

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