Question

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	134,000		$	137,000
Accounts receivable		334,000			481,000
Inventory		563,000			474,000
Plant and equipment, net		829,000			808,000
Investment in Buisson, S.A.		407,000			432,000
Land (undeveloped)		248,000			251,000
Total assets	$	2,515,000		$	2,583,000
Liabilities and Stockholders' Equity
Accounts payable	$	385,000		$	339,000
Long-term debt		1,025,000			1,025,000
Stockholders' equity		1,105,000			1,219,000
Total liabilities and stockholders' equity	$	2,515,000		$	2,583,000

Joel de Paris, Inc. Income Statement
Sales					$	5,076,000
Operating expenses						4,314,600
Net operating income						761,400
Interest and taxes:
Interest expense	$	117,000
Tax expense		204,000				321,000
Net income					$	440,400

The company paid dividends of $326,400 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. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

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

Answer 1

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

	Beginning Balances	Ending Balances
Cash	1,34,000	1,37,000
Accounts receivable	3,34,000	4,81,000
Inventory	5,63,000	4,74,000
Plant and equipment (net)	8,29,000	8,08,000
Total operating assets	18,60,000	19,00,000

Average operating assets = ($18,60,000 + $19,00,000) / 2

= $18,80,000

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year

Margin        = Net operating income / Sales

                    = $7,61,400 / $50,76,000

                   = 15%

Turnover              =Sales / Average operating assets

                             = $50,76,000 / $18,80,000

                             = 2.70

ROI = Margin × Turnover= 15% x 2.70

= 40.5%

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

Net operating income                                 $7,61,400

Less : Minimum required return                 $2,82,000

($1880000 x 15%)

Residual income $4,79,400