Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A. Land (undeveloped) Total assets $ 130,000 $125,000 471,000 484,000 870,000 434,000 250,000 $ 2,562,000 2,634,000 341,000 562,000 877,000 399,000 253,000 Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity Total liabilities and stockholders' equity $ 383,000 336,000 1,018,000 1,280,000 $ 2,562,000 2,634,000 1,018,000 1,161,000 Joel de Paris, Inc. Income Statement Sales Operating expenses Net operating income Interest and taxes: $ 5,404,000 4,593,400 810,600 Interest expense Tax expense ş 114,000 209,000 323,000 $ 487,600 Net income The company paid dividends of $368,600 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 (ROl) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)
3. What was the company's residual income last year?

Answer 1

Answer:

1. $1,930,000

2. Margin = 15%

Turnover = $2.8

Return on investment = 42%

3. $521,100

Explanation:

1. The computation of average operating assets for last year is shown below:-

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

= ($2,562,000 - $399,000 - $253,000) + ($2,634,000 - $434,000 - $250,000) ÷ 2

= ($1,910,000 + $1,950,000) ÷ 2

= $3,860,000 ÷ 2

= $1,930,000

2. The computation of company's margin, turnover, and return on investment is shown below:-

Margin = Net operating income ÷ Sales

= $810,600 ÷ $5,404,000

= 15%

Turnover = Sales ÷ Average operating assets

= $5,404,000 ÷ $1,930,000

= $2.8

Return on investment = Margin × Turnover

= 15% × $2.8

= 42%

3. The computation of residual income last year is shown below:-

Residual income last year = Net operating income - Minimum required return

= $810,600 - ($1,930,000 × 15%)

= $810,600 - $289,500

= $521,100

So, we have applied the above formula.