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		$	139,000
Accounts receivable		340,000			484,000
Inventory		568,000			490,000
Plant and equipment, net		835,000			797,000
Investment in Buisson, S.A.		398,000			426,000
Land (undeveloped)		252,000			246,000
Total assets	$	2,520,000		$	2,582,000
Liabilities and Stockholders' Equity
Accounts payable	$	383,000		$	331,000
Long-term debt		1,016,000			1,016,000
Stockholders' equity		1,121,000			1,235,000
Total liabilities and stockholders' equity	$	2,520,000		$	2,582,000

Joel de Paris, Inc. Income Statement
Sales					$	3,780,000
Operating expenses						3,326,400
Net operating income						453,600
Interest and taxes:
Interest expense	$	110,000
Tax expense		201,000				311,000
Net income					$	142,600

The company paid dividends of $28,600 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
Beginning operating assets=2520000-398000-252000= $1870000
Ending operating assets=2582000-426000-246000= $1910000
Average operating assets=(1870000+1910000)/2 = $1890000
2
Margin = Net operating income / Sales = 453600/3780000= 12%
Turnover = Sales/Average operating assets = 3780000/1890000= 2
Return on investment (ROI) = Margin*Turnover = 12%*2 = 24%
3
Residual income = 453600-(1890000*15%)= $170100