Texas Company
Texas Company has established a target rate of return of 16% for all divisions.For the most recent year,San Marcos 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 $7,000,000.
Refer to Texas Company.In the most recent year,what was San Marcos Division's residual income?
A)$ 960,000
B)$1,380,000
C)$1,540,000
D)$1,700,000

Question

Quizplus · Accepted Answer

Residual income = Net income - (Total assets x Target rate of return)

Total assets = (Beginning total assets + Ending total assets) / 2
Total assets = ($5,000,000 + $7,000,000) / 2 = $6,000,000

Net income = Sales - Expenses = $10,000,000 - $7,500,000 = $2,500,000

Residual income = $2,500,000 - ($6,000,000 x 16%) = $1,540,000

Therefore, the answer is C, $1,540,000.

Texas Company Texas Company Has Established a Target Rate of Return of Return