Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 140,000 $ 120,000 Accounts receivable 450,000 530,000 Inventory 320,000 380,000 Plant and equipment, net 680,000 620,000 Investment in Buisson, S.A. 250,000 280,000 Land (undeveloped) 180,000 170,000 Total assets $ 2,020,000 $ 2,100,000 Liabilities and Stockholders' Equity Accounts payable $ 360,000 $ 310,000 Long-term debt 1,500,000 1,500,000 Stockholders' equity 160,000 290,000 Total liabilities and stockholders' equity $ 2,020,000 $ 2,100,000 Joel de Paris, Inc. Income Statement Sales $ 4,050,000 Operating expenses 3,645,000 Net operating income 405,000 Interest and taxes: Interest expense $ 150,000 Tax expense 110,000 260,000 Net income $ 145,000 The company paid dividends of $15,000 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 "Turnover" to 1 decimal place.) 3. What was the company’s residual income last year?

Answer 1

Explanation:

The  computation is shown below:

1. Average operating assets is

= (Opening operating assets + closing operating assets) ÷ 2

where,

Opening operating assets is

= Total assets -  Land (undeveloped) - Investment in Buisson, S.A

=$2,020,000 - $180,000 - $250,000

= $1,590,000

And, the closing operating assets is

= Total assets -  Land (undeveloped) - Investment in Buisson, S.A

= $2,100,000 - $170,000 - $280,000

= $1,650,000

So, average operating assets is

= ($1,590,000 + $1,650,000) ÷ 2

= $1,620,000

2.

Margin = Net operating income ÷ Sales

= $405,000 ÷ $4,050,000

= 0.1 or 10%

Turnover is

= Sales ÷ Average operating assets

= $4,050,000 ÷ $1,620,000

= 2.5

Return on Investment = Margin ×Turnover

= 0.1 × 2.5

= 0.25 or 25%

3.  Residual Income = Net operating Income - (Average operating assets × Minimum required rate of return)

= $405,000 - ($1,620,000 × 15%)

= $405,000 - $243000

= $162,000

Answer 2

Here, we are going to prepare and solve the requirement using the information in the question.

1.Particulars                                Beginning balance     Ending balance

Cash                                                   $140,000                   $120,000

Accounts receivables                        $450,000                  $530,000

Inventory                                            $320,000                  $380,000

Plant and equipment, net                  $680,000                  $620,000

Total operating assets                     $1,590,000                $1,650,000

Average operating assets = [Beginning total operating assets + Ending total operating assets ] / 2

Average operating assets = [$1,590,000 + $1,650,000] / 2

Average operating assets = $1,620,000

2. Margin = Net operating income / Sales

Margin = $405,000 / $4,050,000

Margin = 0.10

Margin = 10%

Turnover = Sales / Average operating assets

Turnover = $4,050,000 / $1,620,000

Turnover = 2.5

Return on investment (ROI) = Net operating income / Average operating assets

Return on investment (ROI) = $405,000 / $1,620,000

Return on investment (ROI) = 0.25

Return on investment (ROI)= 25%

3. Residual income = Net operating income - (Average operating assets * Minimum required rate of return)

Residual income = $405,000 - ($1,620,000 * 15%)

Residual income = $405,000 - $243,000

Residual income = $162,000

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