Question

if net operating income is $87,000, average operating assets are $500,000, and the minimum required rate of return is 15%, what is the residual income? if net operating income is $87,000, average operating assets are $500,000, and the minimum required rate of return is 15%, what is the residual income? $18,000 $87,000 $19,140 $12,000

Answer 1

Residual income is found by subtracting the minimum required return on assets from the net operating income. In this case, it is $12,000 ($87,000 net operating income - $75,000 minimum required return calculated from a 15% rate on $500,000 average operating assets).

Step-by-step explanation:

To calculate residual income, you need to subtract the product of the average operating assets and the minimum required rate of return from the net operating income. Here, you have a net operating income of $87,000, average operating assets of $500,000, and a minimum required rate of return of 15%.

First, find the minimum required return by multiplying the average operating assets by the minimum rate of return:

$500,000 * 15% = $75,000.

Then, calculate the residual income:

$87,000 (Net Operating Income) - $75,000 (Minimum Required Return) = $12,000 (Residual Income).

Therefore, the residual income is $12,000.