Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	136,000		$	133,000
Accounts receivable		340,000			479,000
Inventory		567,000			485,000
Plant and equipment, net		847,000			833,000
Investment in Buisson, S.A.		402,000			427,000
Land (undeveloped)		245,000			253,000
Total assets	$	2,537,000		$	2,610,000
Liabilities and Stockholders' Equity
Accounts payable	$	374,000		$	343,000
Long-term debt		1,024,000			1,024,000
Stockholders' equity		1,139,000			1,243,000
Total liabilities and stockholders' equity	$	2,537,000		$	2,610,000

Joel de Paris, Inc. Income Statement
Sales					$	4,966,000
Operating expenses						4,221,100
Net operating income						744,900
Interest and taxes:
Interest expense	$	126,000
Tax expense		210,000				336,000
Net income					$	408,900

The company paid dividends of $304,900 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

Part-1.

Computation the average operating assets is:

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

= ($1,890,000 + $1,930,000) / 2

= $3,820,000 / 2

= $1,910,000

Hence, the average operating assets is $1,910,000.

Working notes:

a.

Computation the operating assets at the beginning is:

Operating assets at the beginning = Total assets at the beginning - Amount of investment at the beginning - Value of land at the beginning

= $2,537,000 - $402,000 - $245,000

= $1,890,000

Hence, the operating assets at the beginning is $1,890,000.

b.

Computation the operating assets at the end is:

Operating assets at the end = Total assets at the end - Amount of investment at the end - Value of land at the end

= $2,610,000 - $427,000 - $253,000

= $1,930,000

Hence, the operating assets at the end is $1,930,000.

Part-2.

a.

Computation the margin of the company is:

Margin of the company = (Value of net operating income / Value of sales) * 100

= ($744,900 / $4,966,000) * 100

= 0.15 * 100

= 15%

Hence, the margin of the company is 15%.

b.

Computation the turnover ratio of the company is:

Turnover ratio of the company = Value of sales / Average operating assets

= $4,966,000 / $1,910,000

= 2.6

Hence, the turnover ratio of the company is 2.6

c.

Computation the return on investment is:

Return on investment = Turnover ratio of the company * Margin of the company

= 2.6 * 15%

= 39%

Hence, the return on investment is 39%.

Part-3.

Computation the residual income is:

Residual income = Value of net operating income - Value of minimum rate of required return

= $744,900 - $286,500

= $458,400

Hence, the residual income is $458,400.

Working note:

Computation the value of minimum rate of required return is:

Value of minimum rate of required return = Average operating assets * Minimum required rate of return

= $1,910,000 * 15%

= $286,500

Hence, the value of minimum rate of required return is $286,500.