Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	126,000		$	136,000
Accounts receivable		341,000			479,000
Inventory		580,000			477,000
Plant and equipment, net		883,000			878,000
Investment in Buisson, S.A.		398,000			427,000
Land (undeveloped)		245,000			249,000
Total assets	$	2,573,000		$	2,646,000
Liabilities and Stockholders' Equity
Accounts payable	$	382,000		$	348,000
Long-term debt		960,000			960,000
Stockholders' equity		1,231,000			1,338,000
Total liabilities and stockholders' equity	$	2,573,000		$	2,646,000

Joel de Paris, Inc. Income Statement
Sales					$	4,095,000
Operating expenses						3,480,750
Net operating income						614,250
Interest and taxes:
Interest expense	$	129,000
Tax expense		208,000				337,000
Net income					$	277,250

The company paid dividends of $170,250 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)- Company's average operating assets for last year

	Beginning Balances ($)	Ending Balances ($)
Cash	1,26,000	1,36,000
Accounts receivable	3,41,000	4,79,000
Inventory	5,80,000	4,77,000
Plant and equipment (net)	8,83,000	8,78,000
Total operating assets	19,30,000	19,70,000

Average operating assets = (Total operating assets at the beginning + Total operating assets at the end) / 2

= ($19,30,000 + $19,70,000) / 2

= $39,00,000 / 2

= $19,50,000

(2)-Company’s margin, turnover, and return on investment (ROI) for last year

Company’s Margin

Company’s Margin = [Net operating income / Sales] x 100

= [$614,250 / $40,95,000] x 100

= 15.00%

Company’s Turnover

Company’s Turnover = Sales / Average operating assets

= $40,95,000 / $19,50,000

= 2.10 Times

Company’s Return on Investment (ROI)

Company’s ROI = Margin × Turnover

= 15.00% x 2.10 Times

= 31.50%

(3)-Company’s residual income last year

Particulars	Amount ($)
Net operating income	$614,250
Less: Minimum Required Return [$19,50,000 x 15%]	$292,500
Residual Income	$321,750