Payne Company reported the following information for the current year: $\begin{array}{llr}
\text {Sales } &\$910,000\
\text { Average operating assets} &\$410,000\
\text { Desired ROI } &14\%\
\text { Operating income } &\$61,000
\end{array}$
The company's residual income was:
A) $9,000.
B) $57,400.
C) $3,600.
D) $12,600.

Question

Payne Company reported the following information for the current year: $\begin{array}{llr}
  \text {Sales  } &\$910,000\
 \text {  Average operating assets} &\$410,000\
 \text { Desired ROI } &14\%\
 \text { Operating income } &\$61,000
\end{array}$
 The company's residual income was:
A) $9,000.
B) $57,400.
C) $3,600.
D) $12,600.

Quizplus · Accepted Answer

Residual income = Net operating income - (Minimum required return x Total assets)
Given: 
Net operating income = $33,600
Minimum required return = 10%
Total assets = $360,000

Residual income = $33,600 - (10% x $360,000)
Residual income = $33,600 - $36,000
Residual income = -$2,400

Since the residual income is negative, it means that the company did not earn enough to cover the minimum required return on its total assets, therefore, there is no positive residual income. The closest answer choice is C, which indicates a residual income of $3,600, but since the residual income is negative, none of the answer choices are correct.

Payne Company Reported the Following Information for the Current Year