Question

Juell Assento Fly - Saved to my Mac Mailings Review View Evev AaBBCode AaBbCcDdE AaBbCcD Heading 1 AaBbc Stron Emphasis Normal 1) The following information is provided for Sebastian Inc.: Sebastian Inc. Statement of Financial Position 2019 2018 Assets Cash $ 135,000 $ 266,000 Accounts Receivable 252,000 575,000 Inventory 375,000 362,000 Plant and Equipment (net) 876,000 785,000 Investment in BADM2010 104,000 101,000 Land (undeveloped) 198,000 65,000 Total Assets S1.940.000 $2.154.000 Liabilities and Owners' Equity Accounts Payable Long-term Debt Owners' Equity 1 Total Liabilities and Owners' Equity $ 88,000 585,000 ,267.000 $1.940,000 $119.000 658,000 1.377,000 $2.154.000 Sebastian Inc. Income Statement For the Year Ending Dec. 31/19 Sales $4,744,000 Less operating expenses 4,291,000 Net operating income 453,000 Less interest and taxes: Interest expense $90,000 Tax expense 129,000 219,000 Net Income $234.000 The "Investment in BADM2010" on the statement of financial position represents an investment in the stock of another company. Required: a) Compute the company's margin, turnover, and return on investment for last year. b) The Board of Directors of Beaker Company have set a minimum required return of 15%. What was the company's residual income last year? o Focus

Answer 1

Answer- 1)- Margin – (Net operating income /Sales)*100

= ($453000/$4744000)*100

= 9.55%

Turnover = Sales/ Average operating assets

= $4744000/$1813000

=2.62

Return on investment = Margin*Turnover

= 9.55%*2.62

= 25.02%

Explanation- Calculation of average operating assets = (Opening operating assets+ Closing operating assets)/2

=($266000+$575000+$362000+$785000)+($135000+$252000+$375000+$876000)/2

= ($1988000+$1638000)/2

=$1813000

Operating assets = Cash+ Accounts receivable+ Inventory+ Plant & equipment, net

2)- Residual income for the last year = $181050.

Explanation-

Residual income =Operating income –(Average operating assets*Required rate of return)

= $453000-($1813000*15%)

= $453000-$271950

= $181050