Question

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	127,000		$	126,000
Accounts receivable		349,000			477,000
Inventory		570,000			473,000
Plant and equipment, net		864,000			874,000
Investment in Buisson, S.A.		408,000			429,000
Land (undeveloped)		253,000			254,000
Total assets	$	2,571,000		$	2,633,000
Liabilities and Stockholders' Equity
Accounts payable	$	376,000		$	340,000
Long-term debt		1,035,000			1,035,000
Stockholders' equity		1,160,000			1,258,000
Total liabilities and stockholders' equity	$	2,571,000		$	2,633,000

Joel de Paris, Inc. Income Statement
Sales					$	4,439,000
Operating expenses						3,728,760
Net operating income						710,240
Interest and taxes:
Interest expense	$	125,000
Tax expense		194,000				319,000
Net income					$	391,240

The company paid dividends of $293,240 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

3. What was the company’s residual income last year?

Answer 1

Answer:
1)
Average Operating Assets
Particulars	Beginning Balance ($)	Ending Balance ($)
Cash	$ 127,000	$ 126,000
Accounts Receivable	$ 349,000	$ 477,000
Inventory	$ 570,000	$ 473,000
Plant and Equipment	$ 864,000	$ 874,000
Total Operating Assets	$ 1,910,000	$ 1,950,000

1)

Average Operating Assets        = (Beginning balance Operating Assets + Ending balance Operating Assets) / 2        = ($1,910,000 + $ 1,950,000 ) / 2         =   $1,930,000

2)

Margin   =    Net operating income / Sales =     $ 710,240 / $ 4,439,000   =    16 %

Turnover     =      Sales / Average operating assets = $ 4,439,000 /$1,930,000 = 2.3 Times

Return on investment (ROI) =     Net operating income / Average operating assets                                                            =     $ 710,240   / $1,930,000                                                            =     36.8%

3)

Residual income   =    Net operating income - Minimum required return                                       =       $ 710,240 (-) (Average operating Assets x 15%)                                       =      $ 710,240 (-)   ( $1,930,000 x 15%)                                       =      $ 710,240 (-) $289,500                                        =    $ 420,740