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 $ 133,000 $ 135,000
Accounts receivable 343,000 473,000
Inventory 570,000 483,000
Plant and equipment, net 874,000 869,000
Investment in Buisson, S.A. 393,000 432,000
Land (undeveloped) 247,000 246,000
Total assets $ 2,560,000 $ 2,638,000
Liabilities and Stockholders' Equity
Accounts payable $ 388,000 $ 330,000
Long-term debt 999,000 999,000
Stockholders' equity 1,173,000 1,309,000
Total liabilities and stockholders' equity $ 2,560,000 $ 2,638,000


Joel de Paris, Inc.
Income Statement
Sales $ 4,268,000
Operating expenses 3,670,480
Net operating income 597,520
Interest and taxes:
Interest expense $ 117,000
Tax expense 191,000 308,000
Net income $ 289,520


The company paid dividends of $153,520 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

Answer:

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

Average operating assets = Total operating assets ÷ 2

Total operating assets

Particulars Beginning Balance Ending Balance
Cash $133,000 $135,000
Accounts receivable $343,000 $473,000
Inventory $570,000 $483,000
Plant and equipment ,net $874,000 $869,000
Total operating assets $1,920,000 $1,960,000

Average operating assets = Total operating assets ÷ 2

Average operating assets = ($1,920,000 + $1,960,000 ) ÷ 2

= $3,880,000 ÷ 2

=$1,940,000

2. Computation of the company's margin, turnover, and return on investment (ROI) for the last year.

Company's Margin = Net operating income ÷ Sales × 100

= ($597,520 ÷ $4,268,000 )× 100

= 14%

Company's Turnover = Sales ÷ average operating assets

= $4,268,000 ÷ $1,940,000

= 2.20

Return on investment (ROI) = Company's Margin × Turnover

= 14% × 2.20

= 30.80%

3. Computation of Company's residual income last year:

Particulars Amount
Net operating income $597,250
Less: Company's minimum required return ( note 1) $291,000
Company's Residual income $306,250

Notes:

1. Company's minimum required return = Average operating assets × minimum required rate of return

Company' minimum required return = $1,940,000 × 15%

= $291,000


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