Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	135,000		$	126,000
Accounts receivable		330,000			488,000
Inventory		562,000			485,000
Plant and equipment, net		843,000			811,000
Investment in Buisson, S.A.		396,000			428,000
Land (undeveloped)		247,000			247,000
Total assets	$	2,513,000		$	2,585,000
Liabilities and Stockholders' Equity
Accounts payable	$	374,000		$	346,000
Long-term debt		995,000			995,000
Stockholders' equity		1,144,000			1,244,000
Total liabilities and stockholders' equity	$	2,513,000		$	2,585,000

Joel de Paris, Inc. Income Statement
Sales					$	4,536,000
Operating expenses						3,946,320
Net operating income						589,680
Interest and taxes:
Interest expense	$	128,000
Tax expense		196,000				324,000
Net income					$	265,680

The company paid dividends of $165,680 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 is complete but not entirely correct.

	1. Average operating assets 2. Margin 13.00. selected answer correct- I got this one correct % Turnover ROI % 3. Residual income

Answer 1

Answer of Part 1:

Beginning Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment net
Beginning Operating Assets = $135,000 + $330,000 + $562,000 + $843,000
Beginning Operating Assets = $1,870,000

Ending Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment net
Ending Operating Assets = $126,000 + $488,000 + $485,000 + $811,000
Ending Operating Assets = $1,910,000

Average Operating Assets = (Beginning Operating Assets + Ending Operating Assets) /2
Average Operating Assets = ($1,870,000 + $1,910,000) /2
Average Operating Assets = $1,890,000

Answer of Part 2:

Margin = Net Operating Income / Sales *100
Margin = $589,680 / $4,536,000 *100
Margin = 13%

Turnover = Sales / Average Operating Assets
Turnover = $4,536,000 / $1,890,000
Turnover = 2.4 times

ROI = Margin * Turnover
ROI = 13% * 2.4
ROI = 31.2%

Answer of Part 3:

Residual Income =Net Operating Income – (Minimum Required Rate of Return * Average Operating Assets)
Residual Income = $589,680 – (15% * $1,890,000)
Residual Income = $589,680 - $283,500
Residual Income = $306,180