Multiple choice

If total assets = Rs. 12, 00, 000, sales = Rs. 24, 00, 000, total expenses = Rs. 21, 40, 000 and normal rate of return = 12%, find out residual income:

  1. Rs. 1, 44, 000

  2. R. 2, 60, 000

  3. Rs. 1, 16, 000

  4. Rs. 2, 16, 000
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Residual Income = Net Income - (Total Assets × Normal Rate of Return). First, calculate Net Income = Sales - Expenses = Rs. 24,00,000 - Rs. 21,40,000 = Rs. 2,60,000. Then calculate minimum required return = Rs. 12,00,000 × 12% = Rs. 1,44,000. Residual Income = Rs. 2,60,000 - Rs. 1,44,000 = Rs. 1,16,000. This measures performance above minimum expectations.

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