Question

Residual Income Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last year's results: Adams Division Jefferson Division Net (after-tax) income $713,900 $318,150 Total capital employed 4,280,000 3,640,000 In addition, Washington Company's top management has set a minimum acceptable rate of return equal to 10%. Required: Enter negative values as negative numbers. 1. Calculate the residual income for the Adams Division. $ 2. Calculate the residual income for the Jefferson Division. $

Answer 1

Residual Income

Residual Income = Net Income after tax – [Total Capital Employed x Minimum required rate of return]

(1)- The residual income for the Adams Division

Residual Income = Net Income after tax – [Total Capital Employed x Minimum required rate of return]

= $713,900 – [$42,80,000 x 10%]

= $713,900 – 428,000

= $285,900

(2)- The residual income for the Jefferson Division

Residual Income = Net Income after tax – [Total Capital Employed x Minimum required rate of return]

= $318,150 – [$36,40,000 x 10%]

= $318,150 – 364,000

= -$45,850 (Negative)