The following information is available for Kiss Company:
$$\begin{array} { | l | r | }
\hline \text { Sales } & \$ 100,000 \
\hline \text { Operating expenses } & \$ 94,000 \
\hline \text { Operating assets } & \$ 40,000 \
\hline \text { Stockholder's equity } & \$ 25,000 \
\hline \text { Cost of capital } & 10 \% \
\hline
\end{array}$$What is Kiss Company's residual income?
A) $2,000.
B) $2,500.
C) $3,500.
D) $4,000.

Question

The following information is available for Kiss Company: 
$$\begin{array} { | l | r | } 
\hline \text { Sales } & \$ 100,000 \
\hline \text { Operating expenses } & \$ 94,000 \
\hline \text { Operating assets } & \$ 40,000 \
\hline \text { Stockholder's equity } & \$ 25,000 \
\hline \text { Cost of capital } & 10 \% \
\hline
\end{array}$$What is Kiss Company's residual income?
A) $2,000.
B) $2,500.
C) $3,500.
D) $4,000.

Quizplus · Accepted Answer

Residual income is calculated as operating income minus the product of operating assets and the cost of capital. Operating income is sales minus operating expenses, which is $6,000 ($100,000 - $94,000). The cost of capital charge is $4,000 ($40,000 * 10%). Therefore, residual income is $2,000 ($6,000 - $4,000).

The Following Information Is Available for Kiss Company What Is Kiss Company's Residual Income? A) $2,000

The Following Information Is Available for Kiss Company What Is Kiss Company's Residual Income?
A) $2,000