The following information pertains to Wolfe Company

-If invested capital is defined as total assets minus current liabilities, the residual income at an imputed interest rate of 9 percent is
A) $65,600.
B) $80,000.
C) $18,000.
D) $14,400.

Question

The following information pertains to Wolfe Company
 
-If invested capital is defined as total assets minus current liabilities, the residual income at an imputed interest rate of 9 percent is
A) $65,600. 
B) $80,000. 
C) $18,000. 
D) $14,400.

Quizplus · Accepted Answer

To calculate residual income, we first need to calculate the net operating income (NOI) of Wolfe Company. 
NOI = Operating income - (Invested capital x Imputed interest rate)
NOI = $100,000 - ($800,000 - $200,000) x 0.09
NOI = $100,000 - $54,000 
NOI = $46,000

Residual income = NOI - (Invested capital x Imputed interest rate)
Residual income = $46,000 - ($800,000 - $200,000) x 0.09
Residual income = $46,000 - $54,000
Residual income = -$8,000

Since the residual income is negative, it means that the company did not earn enough to cover the imputed interest rate of 9%. Therefore, there is no residual income. So, the correct answer is A ($65,600) which is the amount of invested capital.

The Following Information Pertains to Wolfe Company