The Commercial Division of Herring Company has income from operations of $420,000 and assets of $910,000

The Commercial Division of Herring Company has income from operations of $420,000 and assets of $910,000. The minimum acceptable rate of return on assets is 8%. What is the residual income for the division?

Answer:
Income from operations…………………………………………………………………… $420,000
Less:  Minimum acceptable income from operations as a
    percent of assets ($910,000 × 8%)………………………………………………………     72,800
Residual income…………………………………………………………………………… $347,200



The Consumer Division of Hernandez Company has income from operations of $90,000 and assets of $450,000. The minimum acceptable rate of return on assets is 10%. What is the residual income for the division?

Answer:

Income from operations…………………………………………………………………… $90,000 

Less:  Minimum acceptable income from operations as a 

      percent of assets ($450,000 × 10%)……………………………………………………   45,000 

Residual income…………………………………………………………………………… $45,000