Question

Mason Division had $1,127,000 in invested assets, sales of $1,233,000, income from operations of $221,000, and a minimum acceptable return of 12%. The residual income for Mason Division is

Answer 1

explanationTo calculate the residual income for Mason Division, follow these steps:

Step 1: Determine the minimum acceptable return:

The minimum acceptable return is given as 12%.

Minimum acceptable return = 12% = 0.12

Step 2: Calculate the required return on invested assets:

Required return = Invested assets × Minimum acceptable return

Required return = $1,127,000 × 0.12

Step 3: Calculate the residual income:

Residual income = Income from operations - Required return

Residual income = $221,000 - (Required return from Step 2)

Now let's substitute the values into the formula and calculate the residual income:

Required return = $1,127,000 × 0.12 = $135,240

Residual income = $221,000 - $135,240

(Answer) Residual income for Mason Division is the difference between income from operations and the required return, which is $85,760.