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What you mean by notional interest is it profit?
Q.A division report profit of $50000 on net asset in their SOFP of $400000 .The company has a target rate of return 10%
Ans; here profit 50000
Notional interest 10%of 40000
So actually it’s profit 10% is rate of return of 400000 net asset therefore 40000 profit? Is it
Notional interest is ‘pretend’ interest payable. We subtract interest on the net assets to calculate the RI, even though there is no interest actually payable.
Therefore in your example, the residual income is 50,000 – (10% x 400,000) = $10,000.
I do explain this in my free lectures.
The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.