Calculating Residual Income Barnard Manufacturing earned operating income last y

Question

Calculating Residual Income

Barnard Manufacturing earned operating income last year as shown in the following income statement:

At the beginning of the year, the value of operating assets was $2,700,000. At the end of the year, the value of operating assets was $2,300,000.

Barnard requires a minimum rate of return of 15%.

Required:

Calculate:

Sales $4,000,000 Cost of goods sold 2,100,000 Gross margin $1,900,000 Selling and administrative expense 1,100,000 Operating income $800,000 Less: Income taxes (@ 40%) 320,000    Net income $480,000

Explanation / Answer

Answer to Part 1.
Average Operating Assets = (Beginning Operating Assets + Ending Operating Assets) / 2
Average Operating Assets = (2,700,000 + 2,300,000) / 2
Average Operating Assets = $2,500,000
Answer to Part 2.
Residual Income = Operating Income – (Minimum Rate of Return * Average Operating Assets)
Residual Income = $800,000 – ($2,500,000 * 15%)
Residual Income = $800,000 - $375,000
Residual Income = $425,000

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.