Question

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

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

Joel de Paris, Inc.
Balance Sheet
Beginning
Balance
Ending
Balance
Assets
Cash $ 139,000 $ 131,000
Accounts receivable 349,000 475,000
Inventory 576,000 473,000
Plant and equipment, net 796,000 821,000
Investment in Buisson, S.A. 393,000 430,000
Land (undeveloped) 251,000 246,000
Total assets $ 2,504,000 $ 2,576,000
Liabilities and Stockholders' Equity
Accounts payable $ 381,000 $ 335,000
Long-term debt 1,049,000 1,049,000
Stockholders' equity 1,074,000 1,192,000
Total liabilities and stockholders' equity $ 2,504,000 $ 2,576,000


Joel de Paris, Inc.
Income Statement
Sales $ 4,136,000
Operating expenses 3,515,600
Net operating income 620,400
Interest and taxes:
Interest expense $ 121,000
Tax expense 205,000 326,000
Net income $ 294,400


The company paid dividends of $176,400 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?

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Answer #1

Answer to Requirement 1:

Beginning operating assets = Cash + Accounts receivable + Inventory + Plant and equipment, net
Beginning operating assets = $139,000 + $349,000 + $576,000 + $796,000
Beginning operating assets = $1,860,000

Ending operating assets = Cash + Accounts receivable + Inventory + Plant and equipment, net
Ending operating assets = $131,000 + $475,000 + $473,000 + $821,000
Ending operating assets = $1,900,000

Average operating assets = (Ending operating assets + Beginning operating assets) / 2
Average operating assets = ($1,900,000 + $1,860,000) / 2
Average operating assets = $1,880,000

Answer to Requirement 2:

Margin = Net operating income / Sales
Margin = $620,400 / $4,136,000
Margin = 0.15 or 15.00%

Turnover = Sales / Average operating assets
Turnover = $4,136,000 / $1,880,000
Turnover = 2.20

Return on investment = Margin * Turnover
Return on investment = 15.00% * 2.20
Return on investment = 33.00%

Answer to Requirement 3:

Residual income = Net operating income - Required rate of return * Average operating assets
Residual income = $620,400 - 0.15 * $1,880,000
Residual income = $620,400 - $282,000
Residual income = $338,400

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