Answer (A) is correct . Return on equity consists of net income divided by total equity. Since the numerator is derived from the income statement, the balance sheet accounts in ? the denominator must be averaged. Beechwood’s return is thus calculated as follows: ROE = $96,000 ÷ {[($300,000 + $300,000) ÷ 2] + [($12,000?+ $28,000) ÷ 2] + [($155,000 + $206,000) ÷ 2]} = $96,000 ÷ ($300,000 + $20,000 + $180,500) = $96,000 ÷ $500,500 = 0.1918
Answer (B) is incorrect because This percentage results from failing to include the reserve for bond retirement in total equity.
Answer (C) is incorrect because This percentage results from failing to include the reserve for bond retirement and retained earnings in the denominator.
Answer (D) is incorrect because This percentage results from improperly using income from operations rather than net income in the numerator.
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Beechwood’s return on shareholders’ equity for the year just ended is