Question

Gilberto Co. reported the following statistics and results for 20x2:
	ROI	20%
	Invested capital	$197994
	Return on sales	14%
	Cost of capital	16%
What was Gilberto’s residual income for 20x2?

Select one:

a. $11880

b. $7920

c. $3960

d. $0

Answer 1

Option (b) is correct

For residual income, first we will calculate net income as per below:

Return on investment (ROI) = Net income / Invested capital

Putting the values in the above formula, we get,

20% = Net income / $197994

Net income = $197994 * 20% = $39598.8

Now, Residual income is:

Residual income = Net income - (Cost of capital * Invested capital)

Residual income = $39598.8 - (16% * $197994)

Residual income = $39598.8 - $31679.04

Residual income = $7919.76 or $7920