This question tested candidates’ knowledge of Return on Investment (ROI) and how it is affected by different transactions which may take place, and was not well answered.

Most candidates are familiar with the ROI calculation of operating profit/net assets (other denominators can be used but net assets is given in the question).

To obtain the correct answer, we need to look at how the transactions given affect profits and net assets.

Looking at each transaction in turn:

Firstly, a machine with NBV of $40k was sold for $50k. This will reduce non-current assets by $40k and, as we are told this was a cash transaction, increase cash by $50k – increasing net assets by $10k. As a profit has been made on disposal, it will also increase profits by $10k.

Secondly, another machine was purchased for $250k. This will increase non-current assets by $250k, but as this was also a cash transaction, decrease cash by $250k, so no net effect. As no depreciation is charged on either machine there is no further effect.

The net effect is therefore +10k to both profit and net assets, so the ROI is ($200k/$1,010k)*100%=19.8%. Therefore answer B.

Answer A was obtained by omitting the profit on disposal from profits – ($190k/$1,010k)=18.8%.

Answer C was obtained by omitting the profit on disposal and increasing net assets by the $250k machine purchase but not subtracting the cash – ($190/$1,260k)=15.1%. Answer D was obtained with the correct profit figure but the incorrect net assets of $1,260k – ($200/$1,260) =15.9%.