Question

Financial data for Bingham Company for last year appear below:

Bingham Company

Balance Sheet

For the years ended Dec 31 2018 and 2019

ASSETS	Dec 31, 2018	Dec 31, 2019
Cash	135,000	266,000
Accounts Receivable	225,000	475,000
Inventory	314,000	394,000
Plant+Equipment (net)	940,000	860,000
Investment in Carr Corp.	104,000	101,000
Land	198,000	65,000
Total Assets	1,916,000	2,161,000
LIABILITIES + EQUITY
Accounts Payable	88,000	119,000
Long-Term Debt	585,000	665,000
Owner’s equity	1,243,000	1,377,000
Total Liabilities + Equity	1,916,000	2,161,000

Bingham Company

Income Statement

For the year ended December 31 2019

	Dec 31, 2018	Dec 31, 2019
Sales	4,040,000	4,464,000
Operating Expenses	3,700,000	4,291,000
Income before Interest + Taxes	260,000	353,000
Interest Expense	55,000	90,000
Tax Expense	85,000	129,000
Operating Income	120,000	134,000

The "Investment in Carr Company" on the statement of financial position represents an investment in the stock of another company.

Required:

a) Compute the company's margin, turnover, and return on investment for last year.
b) The Board of Directors of Beaker Company have set a minimum required return of 15%. What was the company's residual income last year?

Answer 1

	Bingham Company
Balancesheet
	2018	2019
Cash	135,000	266,000
Accounts receivable, net	225,000	475,000
Inventory	314,000	394,000
Total current assets	674,000	1,135,000
Investment in Carr Corp.	104,000	101,000
Land	198,000	65,000
Plant and equipment, net	940,000	860,000
Total assets	1,916,000	2,161,000
Liabilities and Stockholders' Equity
Liabilities:
Accounts Payable	88,000	119,000
Long-Term Debt	585,000	665,000
Total liabilities	673,000	784,000
Total stockholders' equity	1,243,000	1,377,000
Total liabilities and stockholders' equity	1,916,000	2,161,000

For the year ended December 31 2019
	Dec 31, 2018	Dec 31, 2019
Sales	4,040,000	4,464,000
Operating Expenses	3,700,000	4,291,000
Income before Interest + Taxes	260,000	353,000
Interest Expense	55,000	90,000
Tax Expense	85,000	129,000
Operating Income	120,000	134,000

a) Calculation for the year 2018:

Profit margin	Net Income / Sales	2.97%
Accounts receivable turnover	Credit Sales/ Accounts receivables	17.95 times (Assuming the sales are credit sales)
Return on Investment	Net Profit / Cost of Investment	115%

b)

Residual Income

EBIT - (Required rate of return * Operating Assets)

Operating Assets = Total of all operating assets excluding investments = 1812000

Required rate of return * Operating Assets) =1812000*15%=271800

Therefore Residual Income = 260000-271800=11,800