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At the end of 20X1, an investment centre has net assets of $1m and annual operating profits of $190,000. However,
the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and replaced with a
machine costing $250,000. Both the purchase and sale are cash transactions. No depreciation is charged in the year
of purchase or disposal. The investment centre calculates return on investment (ROI) based on closing net assets.Assuming no other changes to profit or net assets, what is the return on investment (ROI) for the year?
Solutuions:
Revised annual profit = $190,000 + $10,000 profit on the sale of the asset = $200,000
Revised net assets = $1,000,000 – $40,000 NBV + $50,000 cash – $250,000 cash + $250,000 asset = $1,010,000
ROI = ($200,000/$1,010,000) x 100 = 19·8%my question:
Why are we adding the whole sales value back to net asset and at the same time recording 10k on the profit acct? the asset is to be removed as we make the sales disposal with a bal of $960K and add and subtract the replacement amt of $250 assuming the cash was from the net asset . Are we not overstating the net asset ?
The net assets include both non-current assets and current assets.
So buying a new machine for 250,000 reduces cash and increases non-current assets. The overall effect on the net assets is zero.
In particular, i emphasis on the sales disposal . I understood the 250k has no effect. The profits of 10k goes into the profit/loss account so why are we adding the 50k to the revised net asset?
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