Return on investment : Return on investment (ROI) is an accounting measure of income divided by an accounting measure of investment. The formula used to determine ROI is given below: Return on investment = Income Investment However, ROI can provide more helpful in evaluating the performance when broken into two components as shown below. Income Investment = Income Revenue × Revenue Investment Residual income: Residual income (RI) is an accounting measure of an income minus a dollar amount for required return on accounting measure of investment. The formula used to determine the RI is given below: Return income = Income − ( Required rate of return × Investment ) To determine: The residual income for D Company.

Question

Residual income and EVA; timing issues. Doorchime Company makes doorbells. It has a weighted-average cost of capital of 6% and total assets of $5,690,000. Doorchime has current liabilities of $550,000. Its operating income for the year was $630,000. Doorchime does not have to pay any income taxes. One of the expenses for accounting purposes was a$70,000 advertising campaign run in early January. The entire amount was deducted this year, although the Doorchime CEO believes the benecial effects of this advertising will last 4 years.

Answer 1

Question

Chapter 23, Problem 23.32E

a.

To determine

Return on investment:

Return on investment (ROI) is an accounting measure of income divided by an accounting measure of investment. The formula used to determine ROI is given below:

Return on investment=IncomeInvestment

However, ROI can provide more helpful in evaluating the performance when broken into two components as shown below.

IncomeInvestment=IncomeRevenue×RevenueInvestment

Residual income:

Residual income (RI) is an accounting measure of an income minus a dollar amount for required return on accounting measure of investment. The formula used to determine the RI is given below:

Return income=Income−(Required rate of return×Investment)

To determine: The residual income for D Company.

b.

To determine

The economic value added (EAV) for D Company.

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