Arkansas Company Arkansas Co.has established a target rate of return of 16% for all divisions.For the most recent year,Little Rock Division generated sales of $10,000,000 and expenses of $7,500,000.Total assets at the beginning of the year were $5,000,000 and total assets at the end of the year were $7,000,000.
Refer to Arkansas Company.In the most recent year,what was Little Rock Division's residual income?

Question

Quizplus · Accepted Answer

Residual income = Net operating income - (Total assets x Target rate of return)
Net operating income = Sales - Expenses = $10,000,000 - $7,500,000 = $2,500,000
Total assets = (Beginning assets + Ending assets) / 2 = ($5,000,000 + $7,000,000) / 2 = $6,000,000
Target rate of return = 16%
Residual income = $2,500,000 - ($6,000,000 x 16%) = $1,540,000
Therefore, the Little Rock Division's residual income was $1,540,000.