The Street Division of Labrosse Logistics has just begun operations with the following setup:- Purchased assets costing $36 million that depreciate over four years, with a salvage value of $7.2 million.- Additional $36 million in non-depreciable assets.- Total investment in assets: $72 million, including a salvage value of $43.2 million.- Annual operating cash flows are $12 million.- Return on Investment (ROI) uses end-of-year asset values.- Depreciation is on a straight-line basis, and taxes are ignored.- Company's cost of capital: 8 percent.**Task:**Compute residual income using two methods: - Net book value for each year.- Gross book value for each year.(Note: All answers should be in thousands of dollars. Negative amounts should be indicated with a minus sign.)**Data Table:**Residual Income:- **Net Book Value:** - Year 1: ($384,000) - Year 2: $192,000 - Year 3: $768,000 - Year 4: $1,344,000- **Gross Book Value:** - Year 1: ($960,000) - Year 2: ($960,000) - Year 3: ($960,000) - Year 4: ($960,000)

Operating assetsOperating assets are the assets of the entity which are engaged in the operating activities of the entity and contribute towards generating the revenue for the core business activity of the entity. Therefore, the assets excluded from the operating assets are unused land, investments, etc.Residual income = Operating income - (Average operating asset x cost of capital)Computation of Residual IncomeYear Operating incomeAverage operating asstMin rate of returnResidual income (RI)[a][b][c][a]-( [b] x [c] )14,800,00064,800,0008%(384,000)24,800,00057,600,0008%192,00034,800,00050,400,0008%768,00044,800,00043,200,0008%1,344,000Working notes:-Computation of net income;Computation of net book value;Computation of Residual IncomeYear Operating incomeAverage operating asstMin rate of returnResidual income (RI) [a][b][c][a]-( [b] x [c] )14,800,00072,000,0008%(960,000)24,800,00072,000,0008%(960,000)34,800,00072,000,0008%(960,000)44,800,00072,000,0008%(960,000)Working notes:-Computation of Gross book value;Answer :Residual IncomeNet book value (BV)Gross book value (BV)Year 1(384,000)(960,000)Year 2192,000(960,000)Year 3768,000(960,000)Year 41,344,000(960,000)

Business

Accounting

The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $36 million and having a four-year expected life, after which the assets can be salvaged for $7.2 million. In addition, the division has $36 million in assets that are not depreciable. After four years, the division will have $36 million available from these nondepreciable assets. This means that the division has invested $72 million in assets with a salvage value of $43.2 million. Annual operating cash flows are $12 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the company uses an 8 percent cost of capital. Required: a. Compute residual income, using net book value for each year. b. Compute residual income, using gross book value for each year. Note: For all the requirements, enter your answers in thousands of dollars. Negative amounts should be indicated by a minus sign. Year 1 Year 2 Year 3 Year 4 Residual Income Net Book Gross Book Value Value $ (384,000) $ 192,000 $ 768,000 $ (960,000) $ (960,000) $ (960,000) $1,344,000 $ (960,000)

The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $36 million and having a four-year expected life, after which the assets can be salvaged for $7.2 million. In addition, the division has $36 million in assets that are not depreciable. After four years, the division will have $36 million available from these nondepreciable assets. This means that the division has invested $72 million in assets with a salvage value of $43.2 million. Annual operating cash flows are $12 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Assume that the company uses an 8 percent cost of capital. Required: a. Compute residual income, using net book value for each year. b. Compute residual income, using gross book value for each year. Note: For all the requirements, enter your answers in thousands of dollars. Negative amounts should be indicated by a minus sign. Year 1 Year 2 Year 3 Year 4 Residual Income Net Book Gross Book Value Value $ (384,000) $ 192,000 $ 768,000 $ (960,000) $ (960,000) $ (960,000) $1,344,000 $ (960,000)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The Street Division of Labrosse Logistics just started operations. It purchased depreciable assets costing $40.0 million and having a four-year expected life, after which the assets can be salvaged for $8.0 million. In addition, the division has $40.0 million in assets that are not depreciable. After four years, the division will have $40.0 million available from these non depreciable assets. This means that the division has invested $80 million in assets with a salvage value of $48.0 million. Annual operating cash flows are $12.8 million. In computing ROI, this division uses end-of-year asset values in the denominator. Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes. Required: a. & b. Compute ROI, using net book value and gross book value for each year. Note: Enter your answers as a percentage rounded to 2 decimal places (i.e., 32.10). Year 1 Year 2 Year 3 Year 4 ROI Net Book Value Gross Book Value % % % % % %
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