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Return on Equity is Net Income ÷ Average Total Equity. Total equity is all of the line items given except for the 7% bonds payable. Reserve for bond retirement is an equity account (see correct answer for an explanation of this). This answer correctly includes the reserve for bond retirement as an equity account in the calculation of average total equity. However, it uses income from operations instead of net income.
Return on Equity is Net Income ÷ Average Total Equity. The trick in this question is calculating what Average Total Equity is. Total equity is all of the line items given except for the 7% bonds payable. Reserve for bond retirement is an equity account. The reserve for bond retirement account is an appropriation of retained earnings. All retained earnings start out classified as Unappropriated Retained Earnings. "Unappropriated" means that the dividends are available to be distributed to shareholders in the form of dividends. Occasionally, however, a company does not want to distribute its retained earnings and this can be communicated to the shareholders (and potential shareholders) through the process of appropriating retained earnings. The appropriation of retained earnings is done by the board of directors and there is only one result of this action. Funds are transferred in the accounting system from retained earnings to the appropriated retained earnings account, which here is called reserve for bond retirement. This action informs the readers of the financial statements that some of the retained earnings are not available for distribution. There is no legal meaning to this, no time period involved (the board can unappropriate the retained earnings at any time), and there are no involved accounting processes to this. Retained earnings is debited to reduce it, and reserve for bond retirement is credited to increase it. So the reserve for bond retirement would be a line item in the equity section of the balance sheet and it is treated just like retained earnings in calculating total equity. Total Equity at the beginning of the year is $467,000 ($300,000 + $12,000 + $155,000). At the end of the year, it is $534,000. So Average Total Equity is ($467,000 + $534,000) ÷ 2, or $500,500. Return on Equity is $96,000 ÷ $500,500, which equals 19.18% or 19.2% rounded.
Return on Equity is Net Income ÷ Average Total Equity. Total equity is all of the line items given except for the 7% bonds payable. Reserve for bond retirement is an equity account (see correct answer for an explanation of this). This answer omits the reserve for bond retirement from the calculation of average total equity.
Return on Equity is Net Income ÷ Average Total Equity. Total equity is all of the line items given except for the 7% bonds payable. Reserve for bond retirement is an equity account (see correct answer for an explanation of this). This is net income ÷ average common stock. Equity includes not only common stock but also the reserve for bond retirement and retained earnings.