Question

Financial data for Guyer Corporation, for last year follow:

Guyer Corporation Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	140,000		$	120,000
Accounts receivable		450,000			530,000
Inventory		320,000			380,000
Plant and equipment, net		680,000			660,000
Investment in ABC, Inc.		250,000			280,000
Land (undeveloped)		180,000			170,000
Total assets	$	2,020,000		$	2,140,000
Liabilities and Stockholders' Equity
Accounts payable	$	360,000		$	310,000
Long-term debt		1,500,000			1,500,000
Stockholders' equity		160,000			330,000
Total liabilities and stockholders' equity	$	2,020,000		$	2,140,000

Guyer Corporation Income Statement
Sales					$	4,050,000
Operating expenses						3,610,000
Net operating income						440,000
Interest and taxes:
Interest expense	$	150,000
Tax expense		110,000				260,000
Net income					$	180,000

The company paid dividends of $15,000 last year. The “Investment in ABC, Inc.” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 5%.

What was the company’s residual income last year?

Multiple Choice

• $73,000

• $333,000

• $98,000

• $358,000

Answer 1

Ans.	Option 4th $358,000
	*WORKING NOTES :
	*Calculations for Average operating assets :
	Assets	Beginning balance	Ending balance
	Cash	$140,000	$120,000
	Accounts receivables	$450,000	$530,000
	Inventory	$320,000	$380,000
	Plant and equipment	$680,000	$660,000
	Total operating assets	$1,590,000	$1,690,000
	*Undeveloped land and investment in other company are not included in operating assets.
	Average operating assets = (Beginning operating assets + Ending operating assets) / 2
	($1,590,000 + $1,690,000) / 2
	$3,280,000 / 2
	$1,640,000
	*Calculations for Minimum required income :
	*Minimum required income   =   Average operating assets * Desired rate of return
	$1,640,000 * 5%
	$82,000
	*Calculations for Residual income :
	Residual income =   Operating income - Minimum required income
	$440,000 - $82,000
	$358,000