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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Residual income

 Based on the data in Exercise 24-10, assume that management has established a 9% minimum acceptable return for invested assets.

 a. Determine the residual income for each division.

 b. Which division has the most residual income?

(a)

To determine

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

Formula of residual income:

Income from operations XXX
Less minimum acceptable income from operations as a percent of invested assets XXX
Residual income XXX

Table (1)

To determine: Residual income of for each division

Explanation

Determine residual income of R Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for R Division.

Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $30,000,000×9%= $2,700,000

Step 2: Determine residual income of R Division.

Particulars Amount ($)
Income from operations $5,400,000
Less minimum acceptable income from operations as a percent of invested assets 2,700,000
Residual income $2,700,000

Table (2)

Determine residual income of C Division.

Step 1: Compute minimum acceptable income from operations as a percent of invested assets for C Division.

Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}= $25,000,000×9%= $2,250,000

Step 2: Determine residual income of C Division

(b)

To determine
The division with highest residual income

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