Kanata Division reported a residual income of $100,000 for the year just ended. The division had $6,000,000 of invested capital and $500,000 of income. On the basis of this information, the imputed interest rate was:

Question

Quizplus · Accepted Answer

Residual income is calculated as the division's income minus the product of the invested capital and the imputed interest rate. Given that the residual income is $100,000, the income is $500,000, and the invested capital is $6,000,000, we can set up the equation: $500,000 - ($6,000,000 * r) = $100,000. Solving for r gives an imputed interest rate of 6.67%.

Kanata Division Reported a Residual Income of $100,000 for the Year