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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Determining missing items in return on investment and residual income computations
The following table presents various rates of return on investment and residual
incomes:

Determine the missing items, identifying each item by the appropriate letter.

To determine

Concept Introduction:

Rate of return on investment represents the investment performance. It is beneficial for investor to compare different investments and select best investment. The benefit or return from the original cost of investment is return on investment.

The missing items in return on investment and residual income computations.

Explanation

Calculation of rate of return on investment:

  Rate of return on investment = Income from operation Invested assets =$400,000$2,500,000=16%

Calculation of acceptable return:

  Minimum acceptable return = $2,500,000×0.12=$300,000

Calculation of residual income:

  Residualincome = $400,000 - $300,000= $100,000 

Calculation of income from operation:

  Income from operation= Minimum acceptable income+Residualincome$ 600,000+$ 240,000= $ 840,000

Calculation of rate of return on investment:

  Rate of return on investment = $840,000$6,000,000=14%

Calculation of minimum rate of return:

  Minimum rate of return = $600,000$6,000,000=10%

Calculation of income from operation:

  Income from operation = $7,500,000×0

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