The Extan division of World Corporation reported a residual income of $200 000. The division had $8 million of invested capital and a profit of $1 million. What is the imputed interest rate?
A) 7.5%
B) 10.0%
C) 12.5%
D) 20%

Question

Quizplus · Accepted Answer

Residual income is calculated as profit minus a charge for the use of invested capital. Using the formula: Residual income = Profit - (Invested Capital x Imputed Interest Rate)
$200 000 = $1 000 000 - ($8 000 000 x Imputed Interest Rate)
Imputed Interest Rate = 0.025 = 2.5 or 2.5%
Therefore, the imputed interest rate is 10% (B).

The Extan Division of World Corporation Reported a Residual Income