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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

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 operationsXXX
Less minimum acceptable income from operations as a percent of invested assetsXXX
Residual incomeXXX

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.

ParticularsAmount ($)
Income from operations$185,000
Less minimum acceptable income from operations as a percent of invested assets138,750
Residual income$46,250

Table (2)

(d)

Determine income from operations.

ParticularsAmount ($)
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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