Question

Financial data for Guyer Corporation, for last year follow: Guyer Corporation Balance Sheet Beginning Balance Ending...

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

Homework Answers

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.

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