Question

Angel Corp has the following operating data for the past year:

Sales	$797,000
Variable Cost	$250,000
Fixed Cost	$100,000
Minimum required rate of return	17%

Balance Sheet Data for beginning and end of year:

Assets	Beginning	Ending
Cash	$5,000	$5,000
Accounts Receivable	$35,000	$40,000
Inventory	$90,000	$95,000
Net PP&E	$100,000	$115,000
Land (held for future use)	$40,000	$40,000
Investments in affiliates	$5,000	$0
Total Assets	$275,000	$295,000
Liabilities & SH Equity
Short Term Debt	$22,000	$27,000
Long Term Debt	$116,000	$117,000
Stockholder's Equity	$137,000	$151,000
Total Liabilities and SH Equity	$275,000	$295,000

Q) Angel Corp's residual income for the past year is closest to:

A) $

Answer 1

Residual income=Net operating income - Minimum required rate of return in dollars

Required rate of return= Average operating assets*Minimum required rate of return

Average operating assets=Beginning+ending operating assets/2

Average operating assets=$235000+$255000/2=$245000

Minimum required rate of return in dollars=$245000*17%=$41650

Net operating income=sales-variable cost- fixed cost

=$797000-$250000-$100000

=$447000

Residual income =$447000-$41650=$405350