Austin Company
Austin Company has established a target rate of return of 15% for all divisions.For the most recent year,Waterloo Division generated sales of $12,000,000 and expenses of $9,000,000.Total assets at the beginning of the year were $7,000,000 and total assets at the end of the year were $9,000,000.
Refer to Austin Company.In the most recent year,what was Waterloo Division's residual income?
A)$1,200,000
B)$1,650,000
C)$1,800,000
D)$1,950,000

Question

Quizplus · Accepted Answer

Residual Income = Operating Income - (Total Assets x Minimum Required Rate of Return)
Minimum Required Rate of Return = 15%

Operating Income = Sales - Expenses
Operating Income = $12,000,000 - $9,000,000 = $3,000,000

Total Assets = (Beginning Assets + Ending Assets) / 2
Total Assets = ($7,000,000 + $9,000,000) / 2 = $8,000,000

Minimum Required Rate of Return = 15% of $8,000,000 = $1,200,000

Residual Income = $3,000,000 - $1,200,000 = $1,800,000

Therefore, the correct answer is (C) $1,800,000.

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