Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	128,000		$	133,000
Accounts receivable		336,000			473,000
Inventory		563,000			487,000
Plant and equipment, net		883,000			857,000
Investment in Buisson, S.A.		399,000			430,000
Land (undeveloped)		247,000			254,000
Total assets	$	2,556,000		$	2,634,000
Liabilities and Stockholders' Equity
Accounts payable	$	373,000		$	335,000
Long-term debt		962,000			962,000
Stockholders' equity		1,221,000			1,337,000
Total liabilities and stockholders' equity	$	2,556,000		$	2,634,000

Joel de Paris, Inc. Income Statement
Sales					$	5,018,000
Operating expenses						4,164,940
Net operating income						853,060
Interest and taxes:
Interest expense	$	125,000
Tax expense		198,000				323,000
Net income					$	530,060

The company paid dividends of $414,060 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

Requirement 1
Joel de Paris, Inc.
Balance Sheet
	Beginning Balance	Ending Balance
Cash	1,28,000	1,33,000
Accounts receivable	3,36,000	4,73,000
Inventory	5,63,000	4,87,000
Plant and equipment, net	8,83,000	8,57,000
Total Operating Assets	19,10,000	19,50,000
Average operating assets = (1910000+1950000)/2
Average operating assets = 1,930,000
Requirement 2
Company margin	853060
Turnover	5018000
ROI = Company's Margin ÷ Average Operating Assets
ROI = $853,060 / $1,930,000
ROI = 0.4420 or 44.20%
Requirement 3
Residual Income = Company's Margin – [AOA × ROR]
ROR = minimum required rate of return
AOA = average operating assets
Residual Income = 853,060 – [1,930,000 × 15%]
Residual Income = $853,060 – $289,500
Residual Income = $563,560