Question

Financial data for Skylar and banks Corporation, for last year follow:

Skylar and banks Corporation Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	140,000		$	120,000
Accounts receivable		450,000			530,000
Inventory		320,000			380,000
Plant and equipment, net		680,000			640,000
Investment in ABC, Inc.		250,000			280,000
Land (undeveloped)		180,000			170,000
Total assets	$	2,020,000		$	2,120,000
Liabilities and Stockholders' Equity
Accounts payable	$	360,000		$	310,000
Long-term debt		1,500,000			1,500,000
Stockholders' equity		160,000			310,000
Total liabilities and stockholders' equity	$	2,020,000		$	2,120,000

Guyer Corporation Income Statement
Sales					$	4,050,000
Operating expenses						3,630,000
Net operating income						420,000
Interest and taxes:
Interest expense	$	150,000
Tax expense		110,000				260,000
Net income					$	160,000

The company paid dividends of $15,000 last year. The “Investment in ABC, Inc.” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 9%.

What was the company’s residual income last year?

What was the company’s residual income last year?

Multiple Choice

• $273,300

• $229,200

• $13,300

• $-30,800

Answer 1

	total operating assets don't include investments in other companies or in undeveloped
	land
					ending	Beginning
					balances	balances
	Cash				120,000	140,000
	account receivable				530,000	450,000
	inventory				380,000	320,000
	plant and equipment,net				640,000	680,000
	total Assets				1,670,000	1,590,000
	Average operating assets = ( ending balances + beginning balances )/2
				(1,670,000+1,590,000)/2
				1630000
	Net operating income				420,000
	minimum required return				9%
	residual income				273300	answer
	Residual income =net operating income - (average operating assets *min required return)