Question

Financial data for Guyer Corporation, for last year follow:

Guyer 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						3,610,000
Net operating income						440,000
Interest and taxes:
Interest expense	$	150,000
Tax expense		110,000				260,000
Net income					$	180,000

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?

Multiple Choice

• $249,200

• $-10,800

• $293,300

• $33,300

Answer 1

Operating assets, beginning = Cash + Accounts receivables + Inventory + Plant and equipment

= 140,000 + 450,000 + 320,000 + 680,000

= $1,590,000

Operating assets, ending = Cash + Accounts receivables + Inventory + Plant and equipment

= 120,000 + 530,000 + 380,000 + 640,000

= $1,670,000

Average operating assets = (Operating assets, beginning + Operating assets, ending)/2

= (1,590,000 + 1,670,000)/2

= $1,630,000

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

= 180,000 - (1,630,000 x 9%)

= 180,000 - 146,700

= $33,300

the company’s residual income last year= $33,300

Fourth option is correct.

Please give a positive rating if you are satisfied with this solution and if you have any query kindly ask.

Thanks!!!