Question : Objective 23.3 Answer the following questions using the information below: Ruth Cleaning : 1217134

 

Objective 23.3

 

Answer the following questions using the information below:

 

Ruth Cleaning Products manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 20X5:

 

 

ASSETS

INCOME

 

Book value

Current value

Book value

Current value

Bleach

$225,000

$300,000

$150,000

$155,000

Cleanser

$450,000

$250,000

$100,000

$105,000

 

The company is currently using a 15% required rate of return.

 

1) What are Bleach’s and Cleanser’s return on investment based on book values, respectively?

A) 0.22; 0.67

B) 0.42; 0.52

C) 0.52; 0.42

D) 0.67; 0.22

 

2) What are Bleach’s and Cleanser’s return on investment based on current values, respectively?

A) 0.22; 0.67

B) 0.42; 0.52

C) 0.52; 0.42

D) 0.67; 0.22

3) What are Bleach’s and Cleanser’s residual incomes based on book values, respectively?

A) $116,250; $32,500

B) $110,000; $67,500

C) $67,500; $110,000

D) $37,500; $116,250

 

Answer the following questions using the information below:

 

Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2009:

 

 

ASSETS

INCOME

 

Book value

Current value

Book value

Current value

Wheels

$485,000

$550,000

$120,000

$140,000

Assembly

$750,000

$1,200,000

$160,000

$172,500

 

The company is currently using a 12% required rate of return.

 

4) What are Wheels’s and Assembly’s return on investment based on book values, respectively?

A) 0.21; 0.25

B) 0.25; 0.21

C) 0.14; 0.25

D) 0.25; 0.14

5) What are Wheels’s and Assembly’s return on investment based on current values, respectively?

A) 0.21; 0.25

B) 0.25; 0.21

C) 0.14; 0.25

D) 0.25; 0.14

 

6) What are Wheels’s and Assembly’s residual incomes based on book values, respectively?

A) $74,000; $28,500

B) $61,800; $70,000

C) $63,500; $59.500

D) $28,500; $74,000

 

7) The cost today of purchasing an asset identical to the one currently held is called a(n):

A) actual cost

B) current cost

C) dual cost

D) fixed cost

8) Residual income calculations are similar to EVA® calculations because in each calculation there is a charge for the division’s invested capital which is deducted from a measure of that division’s profit.

 

9) Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment.

 

10) A firm will see a difference in the return on investment amount depending if they use historical cost or current cost valuation methods for the assets.