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Traceable residual income for a division is being calculated. The following information is available
(1) Head office requires a rate of return of 10% for the division
(2) Properties specifically relating to the division, which are managed by head office amount to $800,000
(3) Other assets totalling $400,000 are controlled by the division
What is the imputed interest charge to be used in the traceable residual income computation for te division?
I solved it as 800000×10% plus 40000×10%= 120000
The only thing I don’t understand is should i used RI formula? But then the profit value is not given
The question does not ask for the residual income, it asks what the imputed interest charge will be. For this, the profit is irrelevant.
The interest will be 10% x $400,000 = $40,000. (the assets managed by head office are not relevant when calculating the traceable residual income for the division).