   Chapter 24, Problem 24.15EX

Chapter
Section
Textbook Problem

Determining missing items in return and residual income computations Data for Uberto Company are presented in the following table of returns on investment and residual incomes: Invested Assets Income from Operations Return on Investment Minimum Return Minimum Acceptable Income from Operations Residual Income $925,000$185,000 (a) 15% (b) (c) $775,000 (d) (e) (f)$93,000 $23,250$450,000 (g) 18% (h) $58,500 (i)$610,000 $97,600 (j) 12% (k) (1) Determine the missing items, identifying each item by the appropriate letter. To determine Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies. Formula of ROI: Return on investment = Income from operationsInvested assets 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 compute: The missing items Explanation (a) Determine ROI. Return on investment = Income from operationsInvested assets$185,000$925,000= 0.20 or 20% (b) Determine minimum acceptable income from operations. Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}=$925,000×15%= $138,750 (c) Determine residual income.  Particulars Amount ($) Income from operations $185,000 Less minimum acceptable income from operations as a percent of invested assets 138,750 Residual income$46,250

Table (2)

(d)

Determine income from operations.

 Particulars Amount ($) Minimum acceptable income from operations$93,000 Add: Residual income $23,250 Residual income$116,250

Table (3)

(e)

Determine ROI.

Return on investment = Income from operationsInvested assets$116,250$775,000= 0.15 or 15%

Note: Refer to missing amount (d) for computation of income from operations.

(f)

Determine minimum acceptable return on assets.

Minimum acceptable income from operations as a percent of invested assets} = {Invested assets × Minimum acceptable return on assets}$93,000 =$775,000×Minimum acceptable returnMinimum acceptable return$93,000$775,000= 0.12 or 12%

(g)

Determine income from operations.

Return on investment = Income from operationsInvested assets0

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