Carriage Incorporated manufactures horse carriages. The company has two division
ID: 2589757 • Letter: C
Question
Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2018:
ASSETS
INCOME
Book Value
Current value
Book value
Current value
Wheels
$ 495 comma 000$495,000
$ 570 comma 000$570,000
$ 130 comma 000$130,000
$ 145 comma 000$145,000
Assembly
$ 750 comma 000$750,000
$ 1 comma 500 comma 000$1,500,000
$ 165 comma 000$165,000
$ 195 comma 000$195,000
The company is currently using a
1212%
required rate of return. What are Wheels's and Assembly's residual incomes based on book values, respectively?
ASSETS
INCOME
Book Value
Current value
Book value
Current value
Wheels
$ 495 comma 000$495,000
$ 570 comma 000$570,000
$ 130 comma 000$130,000
$ 145 comma 000$145,000
Assembly
$ 750 comma 000$750,000
$ 1 comma 500 comma 000$1,500,000
$ 165 comma 000$165,000
$ 195 comma 000$195,000
Explanation / Answer
Residual income (based on book values) = Income - (Assets *desired rate of return)
For Wheels = $130,000 - ($495,000 * 12 %) = $70,600
For Assembly = $165,000 - ($750,000 * 12 %) = $750,00