Problem $14-61($Algo$)$ Economic Value Added $($LO $14-4)$

$10$

points

Gable Corporate Services uses EVA to evaluate the performance of division managers. For the Media Division, after$-$tax divisional income was $$3,140,000$ in year $3.$

The company adjusts the after$-$tax income for advertising expenses. First, it adds the annual advertising expenses back to after$-$tax divislonal income. Second, the company managers belleve that advertising has a three$-$year positive effect on the sale of the company's products, so it amortizes advertising over three years. Advertising expenses in year $1$ will be expensed $40$ percent, $35$ percent in year $2,$ and $25$ percent in year $3.$ Advertising expenses in year $2$ will be expensed $40$ percent, $35$ percent in year $3,$ and $25$ percent in year $4.$ Advertising expenses in year $3$ will be amortized $40$ percent, $35$ percent in year $4,$ and $25$ percent in year $5.$ Third, unamortized advertising expenses become part of the divisional investment in the EVA calculations. Media Division incurred advertising expenses of $$556,000$ in year $1$ and $$1,066,000$ in year $2$ It incurred $$1,276,000$ of advertising in year $3.$

Before considering the unamortized advertising, the Media Division had total assets of $$29,000,000$ and current liabilities of $$3,680,000$ at the beginning of year $3.$ Gable calculates EVA using the divisional investment at the beginning of the year. The company uses a $14$ percent cost of capital to compute EVA.

Required:

Compute the EVA for the Media Division for year $3.$ is the division adding value to shareholders?

Complete this question by entering your answers in the tabs below.

Required $2$

Compute the EVA for the Media Division for year $3.$

Note: Negative amounts should be indicated by a minus sign.

$\backslash$table$[[$Adjusted divisional income,$],[$Cost of adjusted divisional investment,$],[$Economic Value Added $($EVA$),]]$