Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	130,000		$	126,000
Accounts receivable		340,000			479,000
Inventory		571,000			487,000
Plant and equipment, net		809,000			798,000
Investment in Buisson, S.A.		390,000			430,000
Land (undeveloped)		250,000			247,000
Total assets	$	2,490,000		$	2,567,000
Liabilities and Stockholders' Equity
Accounts payable	$	377,000		$	336,000
Long-term debt		953,000			953,000
Stockholders' equity		1,160,000			1,278,000
Total liabilities and stockholders' equity	$	2,490,000		$	2,567,000

Joel de Paris, Inc. Income Statement
Sales					$	4,114,000
Operating expenses						3,496,900
Net operating income						617,100
Interest and taxes:
Interest expense	$	126,000
Tax expense		200,000				326,000
Net income					$	291,100

The company paid dividends of $173,100 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. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

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

Answer 1

Answer of Part 1:

Beginning Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment, Net
Beginning Operating Assets = $130,000 + $340,000 + $571,000 + $809,000
Beginning Operating Assets = $1,850,000

Ending Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment, Net
Ending Operating Assets = $126,000 + $479,000 + $487,000 + $798,000
Ending Operating Assets = $1,890,000

Average Operating Assets = (Beginning Operating Assets + Ending Operating Assets) /2
Average Operating Assets = ($1,850,000 + $1,890,000) /2
Average Operating Assets = $1,870,000

Answer of Part 2:

Margin = Net Operating Income /Sales *100
Margin = $617,100 / $4,114,000 * 100
Margin = 15%

Turnover = Sales / Average Operating Assets
Turnover = $4,114,000 / $1,870,000
Turnover = 2.2 times

ROI = Margin * Turnover
ROI = 15% * 2.2
ROI = 33%

Answer of Part 3:

Residual Income = Net Operating Income – (Minimum Required return * Average Operating Assets)
Residual Income = $617,100 – (15% * $1,870,000)
Residual Income = $617,100 - $280,500
Residual Income = $336,600