Textbook Problem

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Refer to 10.22. If the imputed interest rate is 6%, what is Anders Company residual income for the year?

1. a. ($480)
2. b. $480
3. c. $2,400
4. d. ($2,400)

To determine

Identify Company A’s residual income for the year.

Explanation of Solution

Residual income: The remaining income from operations after deducting the desired acceptable income is referred to as residual income.

$\text{Residual income}\text{=}\text{Operating earnings}\text{–}\left(\text{Minimum acceptable return}\times \text{Invested capital}\right)$

Compute the residual income:

$\begin{array}{c}\text{Residual income}\text{=}\text{Operating earnings}\text{–}(\text{Minimum acceptable return}\times \text{Invested}\end{array}$