If total assets are $550,000 and total net worth (equity) is $200,000, the annual rate of return earned on equity was 25%. What were net earnings for the year?

If total assets are $550,000 and total net worth (equity) is $200,000, the annual rate of return earned on equity was 25%. What were net earnings for the year?

• A. $25,000
• B. $50,000
• C. $200,000
• D. $250,000

Answer: (B)

Return on equity shows how much profit the business earns for each dollar of the owners’ investment. It’s calculated as net earnings divided by total equity. Here, the rate on equity is 25%, and equity is 200,000. Net earnings = 0.25 × 200,000 = 50,000. So the earnings for the year are 50,000. The total assets (550,000) aren’t needed for this calculation, though they imply liabilities of 350,000 (550,000 assets minus 200,000 equity). Quick check: 50,000 is 25% of 200,000, which aligns with the given return on equity. The other amounts would require a different equity base or a different rate, so they don’t fit.

Return on equity shows how much profit the business earns for each dollar of the owners’ investment. It’s calculated as net earnings divided by total equity.

Here, the rate on equity is 25%, and equity is 200,000. Net earnings = 0.25 × 200,000 = 50,000. So the earnings for the year are 50,000. The total assets (550,000) aren’t needed for this calculation, though they imply liabilities of 350,000 (550,000 assets minus 200,000 equity). Quick check: 50,000 is 25% of 200,000, which aligns with the given return on equity. The other amounts would require a different equity base or a different rate, so they don’t fit.