The following information pertains to Garcia Company:
$\begin{array}{ll}
\text { Total assets } & \$ 50,000 \
\text { Net operating profit after taxes } & \$ 10,000 \
\text { Total current liabilities } & \$ 10,000 \
\text { Total expenses } & \$ 60,000 \
\text { Total liabilities } & \$ 15,000 \
\text { Total revenues } & \$ 80,000
\end{array}$
Invested capital is defined as total assets minus current liabilities.The after-tax cost of capital is 20%.What is the residual income?
A) $2,000
B) $4,000
C) $12,000
D) $20,000

Question

Quizplus · Accepted Answer

Residual income is calculated as Net Operating Profit After Taxes (NOPAT) minus the product of Invested Capital and the Cost of Capital. Invested Capital = Total Assets - Total Current Liabilities = $50,000 - $10,000 = $40,000. The cost of capital is 20%, so the cost of capital charge is $40,000 * 20% = $8,000. Residual Income = NOPAT - Cost of Capital Charge = $10,000 - $8,000 = $2,000.

The Following Information Pertains to Garcia Company Invested Capital Is Defined as Total Assets Minus Current Liabilities