Determining Missing Items in Rate of Return and Residual Income Computations Dat

Question

Determining Missing Items in Rate of Return and Residual Income Computations Data for Schmidt Company are presented in the following table of rates of return on investment and residual incomes: Invested Assets Income from Operations Rate of Return on Investment Minimum Rate of Return Minimum Acceptable Income from Operations Residual Income $920,000 $230,000 (a) 14% (b) (c) $520,000 (d) (e) (f) $62,400 $20,800 $320,000 (g) 14% (h) $35,200 (i) $240,000 $50,400 (j) 12% (k) (l) Determine the missing values, identified by the letters above. For all amounts, round to the nearest whole number.

Explanation / Answer

Answer:-

A Rate of Return on Investment = 230,000/920,000 = 25%

B Minimum Rate of Return = 13%

Minimum Acceptable Income from Operations = INCOME FROM OPERATIONS* 14% = 230,000*13% = $32,200

c Residual Income = Income from operations - Minimum Acceptable Income from Operations = $230,000-$32,200 = $ 197,800

d Income from Operations = Residual Income+Minimum Acceptable Income from Operations =$20,800+$62,400 = $83,200

e Rate of Return on Investment = 89,600/560,000*100 = 16%

f Minimum Rate of Return = Minimum Acceptable Income from Operations/Income from Operations *100 = 62,400/83,200 =75%

g Income from Operations = Rate of retrun on investment * invested assets = 320,000*14% = $44,800

h Minimum Rate of Return = 35,200/80,000 = 44%

i $44,800 = Residual Income+Minimum Acceptable Income from Operations = $320,000*.14+$35,200 =

Residual income = $9,600

j Rate of Return on Investment = Income from operations/Invested assets = 50400/240000 = 21%

k Minimum Acceptable Income from Operations = 50,400*12% = $6,048

i Residual income = Income from operations - Minimum Acceptable Income from Operations = $50,400-$6,048 = $44,352

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