dstnsial data for Redstone Company for last year appear below Redstone Company B

Question

dstnsial data for Redstone Company for last year appear below Redstone Company Balance Sheet Beginning Ending Balance Balance Assets: ash ccounts receivable nventory $120,000 $160,000 110,000 100,00 50,000 60,000 180,000 160,00 ant and equipment (net nvestment in Balsam 50,000 60,000 120,000120 630,000 $660,000 om Land (undeveloped) Total assets Liabilities and owners Accounts payable ong-term debt Owners' equity Total liabilities and owners $70,000$90,000 500,000 500,000 60,000 70,00 $630,000 $660 ,000 Redstone Company Income Statement Sales Less operating expenses Net operating income Less interest and taxes: $1.222,000 200 60,000 20,000 Interest expense 0 80,000 42.200 Net income The company paid dividends of $32 200 last year. The Board of Directors of Redstone ha minimum required rate of return of 25% What was the company's residual income last y Investment in Balsam Company" average operating assets.) and (undeveloped)" shoutd be excluded when $4,700 B. $28.200 C. $51,700- D. $18,800 E. None of the above

Explanation / Answer

Calculate average operating assets as follows:

Average operating assets = ($460,000+$480,000)/2 = $470,000

Calculate residual income as follows:

Residual income

= Net operating income - (Average operating assets x Minimum required rate of return

= $122,200 - ($470,000 x 25%)

= $4,700

Therefore, the correct answer is A.

Beginning Balance Ending Balance Cash 120000 160000 Accounts receivable 110000 100000 Inventory 50000 60000 Plant and equipment (net) 180000 160000 Total operating assets 460000 480000

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