Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	127,000		$	133,000
Accounts receivable		340,000			483,000
Inventory		565,000			480,000
Plant and equipment, net		878,000			854,000
Investment in Buisson, S.A.		398,000			434,000
Land (undeveloped)		254,000			251,000
Total assets	$	2,562,000		$	2,635,000
Liabilities and Stockholders' Equity
Accounts payable	$	385,000		$	347,000
Long-term debt		972,000			972,000
Stockholders' equity		1,205,000			1,316,000
Total liabilities and stockholders' equity	$	2,562,000		$	2,635,000

Joel de Paris, Inc. Income Statement
Sales					$	5,018,000
Operating expenses						4,365,660
Net operating income						652,340
Interest and taxes:
Interest expense	$	130,000
Tax expense		195,000				325,000
Net income					$	327,340

The company paid dividends of $216,340 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

SOLUTION

1. Operating assets = Total assets - Investments - Land

Particulars	Beginning ($)	Ending ($)
Total assets	2,562,000	2,635,000
Less:Investments	(398,000)	(434,000)
Less:Land	(254,000)	(251,000)
Operating assets	1,910,000	1,950,000

Average operating assets = (Beginning operating assets + Ending operating assets) / 2

= ($1,910,000 + $1,950,000)/2

= $3,860,000/2 = $1,930,000

2. Margin = Net operating income / sales

= $652,340/ $5,018,000

= 13%

Turnover = Sales/ Average operating assets

= $5,018,000 / $1,930,000

= 2.6

ROI = Margin * Turnover

= 13% * 2.6

= 33.8%

3. Residual Income= Net operating income - Minimum required return on average operating assets

=$652,340 - (15% * $1,930,000)

=$652,340 -$289,500

= $362,840