Question

In: Accounting

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

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

Joel de Paris, Inc.
Balance Sheet
Beginning
Balance
Ending
Balance
Assets
Cash $ 134,000 $ 133,000
Accounts receivable 336,000 486,000
Inventory 575,000 489,000
Plant and equipment, net 885,000 862,000
Investment in Buisson, S.A. 407,000 426,000
Land (undeveloped) 251,000 246,000
Total assets $ 2,588,000 $ 2,642,000
Liabilities and Stockholders' Equity
Accounts payable $ 373,000 $ 348,000
Long-term debt 1,049,000 1,049,000
Stockholders' equity 1,166,000 1,245,000
Total liabilities and stockholders' equity $ 2,588,000 $ 2,642,000


Joel de Paris, Inc.
Income Statement
Sales $ 5,070,000
Operating expenses 4,461,600
Net operating income 608,400
Interest and taxes:
Interest expense $ 114,000
Tax expense 205,000 319,000
Net income $ 289,400


The company paid dividends of $210,400 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. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

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

Solutions

Expert Solution

1.   Calculation of Average operating assets :-

Particulars Beginning balance (in $) Ending balance (in $)

Cash

Account receivable

Inventory

Plant and Equipment

134,000

336,000

575,000

885,000

133,000

486,000

489,000

862,000

Total Operating assets 1,930,000 1,970,000

Investment in Buisson, S.A. , Undeveloped Land is not operating Assets

Average operating assets = (1930000 + 1970000) / 2

                                           = 3900000 / 2

                                           = $ 1950000.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year

Margin =   Net operating income / Sales    = 608,400 / 5,070,000
                                                                    = 0.12 or 12%

Turnover = Sales / Average operating assets = 5,070,000/1950000

                                                                               = 2.6 Times

Return on investment (ROI) = Net Operating Income/ Average Operating Assets

                                                = 608400/1950000

                                                = 0.312 or 31.20 %

3. company’s residual income last year

Particulars Amount
Net Operating Income $608,400

Less: Minimum required return on Average Operating Assets

                                (1950000x15%)

$292,500
Residual Income $315,900

                                          


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