The following information relates to the Cliff Division of Mountain Enterprises:
Income for the period just ended: $1,500,000
Invested capital: $12,000,000
If the company has an imputed interest rate of 11%, Cliff's residual income would be:
A) $165,000.
B) $180,000.
C) $187,500.
D) some other dollar amount other than the ones given.
E) a percentage greater than 11%.

Question

Quizplus · Accepted Answer

Residual income is calculated as income minus a charge for the use of capital, which is the invested capital multiplied by the imputed interest rate. 
Residual income = $1,500,000 - ($12,000,000 x 0.11) 
Residual income = $1,500,000 - $1,320,000 
Residual income = $180,000 
Therefore, the answer is B.

The Following Information Relates to the Cliff Division of Mountain