Question

the northern division of the smith company had average total operating assets of $150,000 last year. its minimum required rate of return was 12%. the division reported operating income of $20,000. what was the residual income for the northern division last year?

Answer 1

Residual income for the northern division of the Smith Company last year was calculated by subtracting the minimum required return on its operating assets from the reported operating income, resulting in $2,000.

Step-by-step explanation:

The question pertains to the concept of residual income in corporate finance. Residual income is the income earned by a division or company after accounting for the minimum required rate of return on its operating assets. To calculate the residual income for the northern division of the Smith Company, we must first calculate the minimum required return on the division's average total operating assets. Given that the division had average total operating assets of $150,000 and the minimum required rate of return was 12%, we calculate this return as:

Minimum Required Return = 150,000 x 0.12 = $18,000

Next, we deduct this value from the division's reported operating income of $20,000 to find the residual income:

Residual Income = Operating Income - Minimum Required Return

Residual Income = 20,000 - 18,000 = $2,000

Therefore, the residual income for the northern division of the Smith Company last year was $2,000.