Determining missing items in return and residual income computations Data for Ub
ID: 2538252 • Letter: D
Question
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:
Determine the missing values, identified by the letters above. For all amounts, round to the nearest whole number.
Invested Assets
Income from Operations
Return on Investment Minimum Return on Investment Minimum Acceptable Income from Operations
Residual Income $930,000 $204,600 (a) 12% (b) (c) $520,000 (d) (e) (f) $62,400 $20,800 $340,000 (g) 14% (h) $34,000 (i) $260,000 $54,600 (j) 12% (k) (l)
Explanation / Answer
Uberto Company
Determination of missing values:
A
22%
B
$111,600
C
$93,000
D
$83,200
E
16%
F
12%
G
$47,600
H
10%
I
$13,600
J
21%
K
$31,200
L
$23,400
Workings:
Income from operations = $204,600
Invested assets = $930,000
Return on investments = 204,600/930,000 = 22%
= Minimum acceptable income from operations = minimum return on investment x invested assets
Minimum return = 12%
Invested assets = $930,000
Minimum acceptable income from operations = 930,000 x 12% = $111,600
Residual income = income from operations - Minimum acceptable income from operations
Income from operations = $204,600
Minimum acceptable income from operations = $111,600
Residual income = 204,600 – 111, 600 = $93,000
Income from operations = Minimum acceptable income from operations + residual income
Minimum acceptable income from operations =$62,400
Residual income = $20,800
Income from operations = 62,400 + 20,800 = $83,200
Return on investment = income from operations/invested assets
Income from operations = $83,200
Invested assets = $520,000
Return on investment = 16%
Invested assets = $520,000
Minimum return on investment = 62,400/520,000 = 12%
Income from operations = return on investment x invested assets
Return on investments= 14%
Invested assets = $340,000
Income from operations = $340,000 x 14% = $47,600
Invested assets = $340,000
Minimum return on investment = 34,000/340,000 = 10%
Income from operations = $47,600
Minimum acceptable income from operations = $34,000
Residual income = 13,600
Return on investment = income from operations/invested assets
Income from operations = $54,600
Invested assets = $260,000
Return on investment = 54,600/260,000 =21%
Minimum acceptable income from operations = invested assets x minimum return on investment
Invested assets = $260,000
Minimum return on investment = 12%
Minimum acceptable income from operations = 260,000 x 12% = $31,200
Residual income = income from operations – minimum acceptable income from operations
Income from operations = $54,600
Minimum acceptable income from operations = $31,200
Residual income = 54,600 – 31,200 = $23,400
A
22%
B
$111,600
C
$93,000
D
$83,200
E
16%
F
12%
G
$47,600
H
10%
I
$13,600
J
21%
K
$31,200
L
$23,400
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