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						3,640,000
Net operating income						410,000
Interest and taxes:
Interest expense	$	150,000
Tax expense		110,000				260,000
Net income					$	150,000

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 8%.

What was the company’s residual income last year?

Multiple Choice

• $279,600

• $-19,600

• $240,400

• $19,600

Answer 1

Residual income = Operating income- minimum required rate of return * Average operating asset

Average operating Assets= beginning balance + ending balance ÷2

=(1590000+ 1670000)÷2 =1630000

So Residual Income= 410000 - (8%*1630000)= 279600 (Option A)

Working Notes

Operating assets Begening balance = 2020000-250000-180000=1590000

Operating assets Ending balance =2120000 -280000-170000 =1670000

*Both investment and Land (undeveloped )are excluded while calculating average operating assets since they are not used for any operational activities.