1. Calculate residual income, assuming Doorchime defines investment as total assets. 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added the advertising is capitalized and amortized on a straight- line basis over 4 years. 3. Discuss the difference between the outcomes of requirements 1 and 2. Which measure would you recommend, and why? Required
1. Calculate residual income, assuming Doorchime defines investment as total assets. 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added the advertising is capitalized and amortized on a straight- line basis over 4 years. 3. Discuss the difference between the outcomes of requirements 1 and 2. Which measure would you recommend, and why? Required
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Residual income and EVA; timing issues. Doorchime Company makes doorbells. It has a weighted-average cost of capital of 6% and total assets of $5,690,000. Doorchime has current liabilities of $550,000. Its operating income for the year was $630,000. Doorchime does not have to pay any income taxes. One of the expenses for accounting purposes was a
$70,000 advertising campaign run in early January. The entire amount was deducted this year, although the Doorchime CEO believes the benecial effects of this advertising will last 4 years.
Transcribed Image Text:1. Calculate residual income, assuming Doorchime defines investment as total assets.
2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming
that for the purposes of economic value added the advertising is capitalized and amortized on a straight-
line basis over 4 years.
3. Discuss the difference between the outcomes of requirements 1 and 2. Which measure would you
recommend, and why?
Required
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