Question

Determining missing items in return and residual income computations

Data for Uberto Company are presented in the following table of returns on investment and residual incomes:

Invested Assets		Income from Operations		Return on Investment		Minimum Return on Investment		Minimum Acceptable Income from Operations		Residual Income
$930,000		$204,600		(a)		12%		(b)		(c)
$520,000		(d)		(e)		(f)		$62,400		$20,800
$340,000		(g)		14%		(h)		$34,000		(i)
$260,000		$54,600		(j)		12%		(k)		(l)

Determine the missing values, identified by the letters above. For all amounts, round to the nearest whole number.

a.									%
b.	$
c.	$
d.	$
e.									%
f.									%
g.	$
h.									%
i.	$
j.									%
k.	$
l.	$

Answer 1

Solution

Uberto Company

Determination of missing values:

A	22%
B	$111,600
C	$93,000
D	$83,200
E	16%
F	12%
G	$47,600
H	10%
I	$13,600
J	21%
K	$31,200
L	$23,400

Workings:

1. Return on investment = income from operations/invested assets

Income from operations = $204,600

Invested assets = $930,000

Return on investments = 204,600/930,000 = 22%

1. Minimum acceptable income from operations –

= Minimum acceptable income from operations = minimum return on investment x invested assets

Minimum return = 12%

Invested assets = $930,000

Minimum acceptable income from operations = 930,000 x 12% = $111,600

1. Residual Income –

Residual income = income from operations - Minimum acceptable income from operations

Income from operations = $204,600

Minimum acceptable income from operations = $111,600

Residual income = 204,600 – 111, 600 = $93,000

1. Income from operations –

Income from operations = Minimum acceptable income from operations + residual income

Minimum acceptable income from operations =$62,400

Residual income = $20,800

Income from operations = 62,400 + 20,800 = $83,200

1. Return on investment –

Return on investment = income from operations/invested assets

Income from operations = $83,200

Invested assets = $520,000

Return on investment = 16%

1. Minimum return on investment = Minimum acceptable income from operations/invested assets
   Minimum acceptable income from operations = $62,400

Invested assets = $520,000

Minimum return on investment = 62,400/520,000 = 12%

1. Income from operations –

Income from operations = return on investment x invested assets

Return on investments= 14%

Invested assets = $340,000

Income from operations = $340,000 x 14% = $47,600

1. Minimum return on investment = Minimum acceptable income from operations/invested assets
   Minimum acceptable income from operations = $34,000

Invested assets = $340,000

Minimum return on investment = 34,000/340,000 = 10%

1. Residual income = income from operations – minimum acceptable income from operations

Income from operations = $47,600

Minimum acceptable income from operations = $34,000

Residual income = 13,600

1. Return on investment –

Return on investment = income from operations/invested assets

Income from operations = $54,600

Invested assets = $260,000

Return on investment = 54,600/260,000 =21%

1. Minimum acceptable income from operations –

Minimum acceptable income from operations = invested assets x minimum return on investment

Invested assets = $260,000

Minimum return on investment = 12%

Minimum acceptable income from operations = 260,000 x 12% = $31,200

• Residual income –

Residual income = income from operations – minimum acceptable income from operations

Income from operations = $54,600

Minimum acceptable income from operations = $31,200

Residual income = 54,600 – 31,200 = $23,400