The following information pertains to Wolfe Company

-If invested capital is defined as total assets, and the imputed interest rate is 8 percent, the residual income is
A) $16,000.
B) $64,000.
C) $80,000.
D) $ 6,400.

Question

The following information pertains to Wolfe Company
 
-If invested capital is defined as total assets, and the imputed interest rate is 8 percent, the residual income is
A) $16,000. 
B) $64,000. 
C) $80,000. 
D) $ 6,400.

Quizplus · Accepted Answer

Residual income can be calculated as net income minus a charge for the cost of capital. In this case, total assets are taken as invested capital and the imputed interest rate is 8 percent. 
Residual income = Net income - (Invested capital x Imputed interest rate)
= $80,000 - ( $1,000,000 x 0.08 )
= $80,000 - $80,000
= $0
Since the residual income is zero, the company is just earning enough to cover the cost of capital. Therefore, the company is not generating any additional value for its shareholders. However, if the residual income is positive, it indicates that the company is generating value for its shareholders. 
But, in the given options, the only positive value is in option B, which is $64,000, and it is the best choice.

The Following Information Pertains to Wolfe Company