Chapter 24, Problem 3AA

Requirement-1

To determine

To Calculate:

The Residual income for Samsung for the year 2017

Answer to Problem 3AA

The Residual income for Samsung for the year 2017 shall be19,809,453 millions of Korean won.

Explanation of Solution

The Residual income for Samsung for the year 2017 is calculated as follows:

	Samsung
In millions of Korean won	Year 2017
Beginning Total Assets (A)	262,174,324
Ending Total Assets (B)	301,752,090
Average Total Assets (C) = (A+B)/2	281,963,207
Target Rate of Return (B)	12%
Target Income (C) =A*B =	33,835,585
Operating Income (D)	53,645,038
Residual Income (RI) = D-C =	19,809,453

Concept Introduction:

Residual Income (RI):

Residual Income is the income earned over and above the expected rate of return on assets invested in the business. The formulas to calculate the Residual Income is as follows:

  $ResidualIncome=OperatingIncome–\left(Averageassets\times RequiredrateorReturn\right)$

Return on total Assets/ Investment:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Requirement-2

To determine

To Calculate:

The Return on investment for Samsung for the year 2017

Answer to Problem 3AA

The Return on investment for Samsung for the year 2017 is 19.03%

Explanation of Solution

The Return on investment for Samsung for the year 2017 is calculated as follows:

	Samsung
In millions of Korean won	Year 2017
Beginning Total Assets (A)	262,174,324
Ending Total Assets (B)	301,752,090
Average Total Assets (C) = (A+B)/2	281,963,207
Operating Income (D)	53,645,038
Return on Investment (ROI) = D/C =	19.03%

Concept Introduction:

Residual Income (RI):

Residual Income is the income earned over and above the expected rate of return on assets invested in the business. The formulas to calculate the Residual Income is as follows:

  $ResidualIncome=OperatingIncome–\left(Averageassets\times RequiredrateorReturn\right)$

Return on total Assets/ Investment:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Requirement-3

To determine

To Calculate:

The Return on investment for Apple for the year 2017

Answer to Problem 3AA

The Return on investment for Apple for the year 2017 is 17.60%

Explanation of Solution

The Return on investment for Apple for the year 2017 is calculated as follows:

	Apple
$ Millions	Year 2017
Beginning Total Assets (A)	$ 321,686
Ending Total Assets (B)	$ 375,319
Average Total Assets (C) = (A+B)/2	$ 348,503
Operating Income (D)	$ 61,344
Return on Investment (ROI) = D/C =	17.60%

Concept Introduction:

Residual Income (RI):

Residual Income is the income earned over and above the expected rate of return on assets invested in the business. The formulas to calculate the Residual Income is as follows:

  $ResidualIncome=OperatingIncome–\left(Averageassets\times RequiredrateorReturn\right)$

Return on total Assets/ Investment:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Requirement-4

To determine

To Indicate:

The Company which has higher Return on investment for the year 2017

Answer to Problem 3AA

Samsung Company has the higher Return on investment for the year 2017

Explanation of Solution

The Return on investment for Samsung for the year 2017 is 19.03%

The Return on investment for Apple for the year 2017 is 17.60%

Hence, Samsung Company has the higher Return on investment for the year 2017