Question

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?

Answer 1

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