Question

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?

Answer 1

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