Straight Line Depreciation

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

Question

Pakex is a division of an automobile group that has five years remaining on a leased premises in which it sells self-assembled motorcycles. The management is proposing an investment of ₦48 million on immediate improvements to the interior of the premises in order to stimulate sales by creating a more effective selling environment. The following information is available:

(i) The expected increase in revenue following the improvements is ₦40 million per annum. The average contribution to sales ratio is expected to be 40%.

(ii) The cost of capital is 16% and the division has a target Return on Capital Employed of 20% based on the net book value of the investment at the beginning of the year.

(iii) At the end of the five-year period, the premises improvements will have a NIL residual value.

(iv) The management staff turnover at Pakex division is high. The division’s investment decisions and management performance measurement are currently based on the figures for the first year of the proposal.

In addition to the above information, there is an alternative proposal that suggests a forecast of the increase in revenue per annum from the premises improvements as follows:

Year	1	2	3	4	5
Increase in Revenue	56	40	40	24	16

All other factors are expected to remain the same.

Required: a. Prepare a summary of the statement of the management’s investment proposal for years 1 to 5 showing Residual Income and Return on Capital Employed for each year using the straight-line depreciation method. (10 Marks)
b. Comment on the use of the figures from the Statement in (a) above as a decision-making and management performance measure. (4 Marks)
c. Calculate the Residual Income and Return on Capital Employed for year 1 using the alternative proposal. (6 Marks)

Answer

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Tags: Investment Appraisal, Management Performance, Residual Income, ROCE, Straight Line Depreciation
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: MAY 2015

FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Describe the elements of financial statements per the IASB framework and compute depreciation using different methods, adjusting net profit accordingly.

Question

a) Describe the FIVE (5) main elements of financial statements in accordance with the IASB’s Conceptual Framework. (10 marks)

b) Bimbila Ltd commenced business on 1 June 2020 and reported the following net profits during its first two years in business:

	GHȼ
1 June 2020 to 31 May 2021	135,000
1 June 2021 to 31 May 2022	140,000

During this period the following non-current assets were purchased on the dates shown:

Bimbila Ltd has a policy to depreciate machinery at 25% per annum on cost (straight line method) and equipment at 20% per annum on cost (straight line method), rates being charged for each month of ownership. Bimbila Ltd is now considering using the reducing balance method, with the following rates applying to the balance at the end of each year:

Machinery: 20%
Equipment: 15%

A full year’s depreciation is charged irrespective of the date of purchase.

Required:

i) Calculate the total depreciation for the years ended 31 May 2021 and 31 May 2022 using the original method (straight line) and rates for:

Machinery (2 marks)
Equipment (1 mark)

ii) Calculate the total depreciation for the years ended 31 May 2021 and 31 May 2022 using the alternative method (reducing balance) and rates for:

Machinery (2 marks)
Equipment (1 mark)

iii) Prepare a statement to show the net profit which would have been reported for each of the years ended 31 May 2021 and 31 May 2022 if the reducing balance method had been used. (4 marks)

Answer

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Topic: Non-current assets and depreciation, The IASB’s Conceptual Framework
Series: JULY 2023

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

Question

(i) The expected increase in revenue following the improvements is ₦40 million per annum. The average contribution to sales ratio is expected to be 40%.

(ii) The cost of capital is 16% and the division has a target Return on Capital Employed of 20% based on the net book value of the investment at the beginning of the year.

(iii) At the end of the five-year period, the premises improvements will have a NIL residual value.

In addition to the above information, there is an alternative proposal that suggests a forecast of the increase in revenue per annum from the premises improvements as follows:

Year	1	2	3	4	5
Increase in Revenue	56	40	40	24	16

All other factors are expected to remain the same.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Investment Appraisal, Management Performance, Residual Income, ROCE, Straight Line Depreciation
Level: Level 2

Topic: Cost-Volume-Profit (CVP) Analysis
Series: MAY 2015

FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Describe the elements of financial statements per the IASB framework and compute depreciation using different methods, adjusting net profit accordingly.

Question

a) Describe the FIVE (5) main elements of financial statements in accordance with the IASB’s Conceptual Framework. (10 marks)

b) Bimbila Ltd commenced business on 1 June 2020 and reported the following net profits during its first two years in business:

	GHȼ
1 June 2020 to 31 May 2021	135,000
1 June 2021 to 31 May 2022	140,000

During this period the following non-current assets were purchased on the dates shown:

Machinery: 20%
Equipment: 15%

A full year’s depreciation is charged irrespective of the date of purchase.

Required:

i) Calculate the total depreciation for the years ended 31 May 2021 and 31 May 2022 using the original method (straight line) and rates for:

Machinery (2 marks)
Equipment (1 mark)

ii) Calculate the total depreciation for the years ended 31 May 2021 and 31 May 2022 using the alternative method (reducing balance) and rates for:

Machinery (2 marks)
Equipment (1 mark)

iii) Prepare a statement to show the net profit which would have been reported for each of the years ended 31 May 2021 and 31 May 2022 if the reducing balance method had been used. (4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Topic: Non-current assets and depreciation, The IASB’s Conceptual Framework
Series: JULY 2023

Question Tag: Straight Line Depreciation

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FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Describe the elements of financial statements per the IASB framework and compute depreciation using different methods, adjusting net profit accordingly.

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Describe the elements of financial statements per the IASB framework and compute depreciation using different methods, adjusting net profit accordingly.

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Question Tag: Straight Line Depreciation

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FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

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FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Describe the elements of financial statements per the IASB framework and compute depreciation using different methods, adjusting net profit accordingly.

You're reporting an error for "FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework"

FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

Evaluate Pakex's investment proposal using Residual Income and ROCE, including alternative proposal analysis for decision-making.

You're reporting an error for "FM – May 2015 – L2 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis"

FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework

Describe the elements of financial statements per the IASB framework and compute depreciation using different methods, adjusting net profit accordingly.

You're reporting an error for "FA – July 2023 – L1 – Q1 – Non-current assets and depreciation | The IASB’s Conceptual Framework"

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