Exhibit 11-1
Ashville Company has two divisions - Bikes and Trikes.
$\begin{array}{c}
\text { Ashville Company}\
\text { Segmented Income Statements}\
\text { For the Current Fiscal Year Ended December 31}\\\begin{array}{lrr}
&\text { Bikes Division } & \text { Trikes Division }\
\text { Sales } & \$ 2,400,000 & \$ 1,000,000 \
\text { Cost of goods sold } & 1,400,000 & 530,000 \
\text { Gross margin } & 1,000,000 & 470,000 \
\text { Allocated overhead (from corporate) } & 270,000 & 170,000 \
\text { Selling and administrative expenses } & 190,000 & 140,000 \
\text { Operating income } & 540,000 & 160,000 \
\text { Income tax expense (40\%) } & \mathbf{2 1 6 , 0 0 0} & \underline{64,000} \
\text { Net income } & \$ 324,000 & \$ 96,000
\end{array}\end{array}$
-Refer to Exhibit 11-1.Assume the Trikes Division has average operating assets totaling $400,000 for the year and the company's cost of capital rate is ten percent.What is the residual income for the Trikes division?

Question

Exhibit 11-1
Ashville Company has two divisions - Bikes and Trikes.
 $\begin{array}{c}
\text { Ashville Company}\
\text {  Segmented Income Statements}\
\text {  For the Current Fiscal Year Ended December 31}\\\begin{array}{lrr}
&\text { Bikes Division } & \text { Trikes Division }\
\text { Sales } & \$ 2,400,000 & \$ 1,000,000 \
\text { Cost of goods sold } & 1,400,000 & 530,000 \
 \text { Gross margin } & 1,000,000 & 470,000 \
\text { Allocated overhead (from corporate) } & 270,000 & 170,000 \
\text { Selling and administrative expenses } & 190,000 & 140,000 \
\text { Operating income } & 540,000 & 160,000 \
\text { Income tax expense (40\%) } & \mathbf{2 1 6 , 0 0 0} & \underline{64,000} \
\text { Net income } & \$ 324,000 & \$ 96,000
\end{array}\end{array}$
-Refer to Exhibit 11-1.Assume the Trikes Division has average operating assets totaling $400,000 for the year and the company's cost of capital rate is ten percent.What is the residual income for the Trikes division?

Quizplus · Accepted Answer

Residual income is the operating income that is earned above the cost of capital. To calculate the residual income for the Trikes Division, we need to first calculate its operating income. Operating income for the division is $80,000 ($500,000 - $400,000). The cost of capital rate for the company is ten percent, so the minimum required return on the Trikes division's average operating assets is $40,000 ($400,000 * 0.1). Therefore, the residual income for the Trikes division is $40,000 ($80,000 - $40,000), which is answer choice D.

Exhibit 11-1 Ashville Company Has Two Divisions - Bikes and Trikes

Exhibit 11-1
Ashville Company Has Two Divisions - Bikes and Trikes