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Hi, Sir. Kindly help me with the questions below. Thanks.
1) TRACEABLE residual income for a division is being calculated. The following information is available.
(a) Head office requires a rate of return of 10% for the division.
(b) Properties relating to the division, but managed by head office amount to
$ 800,000.
(c) Other assets totaling $ 400,000 are controlled by the division.What is the imputed interest charge to be used in the residual income computation for the division?
My solution:
Imputed interest charge for TRACEABLE residual income = 10% x $800,000 = $ 80,000.Is the answer Correct?
IF I change the question to ask for CONTROLLABLE residual income, then the imputed interest charge for it = 10% x $ 400,000 = $ 40,000.
I am quite confused between traceable and controllable.
2. An investment will yield a cash INFLOW of $ 500 per year FOREVER, starting in one year’s time, and cash OUTFLOW of $ 200 each year for TEN years, starting in one year’s time.
At an interest rate of 10% per annum, what is the present value of the investment’s net cash flows (to the nearest $100)?(a) $ 3800 (b) $ 1800 (c) $ 3600 (d) $5000
3. Effective annual interest rate represents as
(a) the annual SIMPLE interest rate when interest is added at non-annual intervals
OR
(b) the annual COMPOUND interest rate when interest is added at non-annual intervalsAnswer should be a or b ???
Thanks sir in advance. =D
I will answer you, but surely you already have answers in the same book in which you found the questions??
1. No – your answer is wrong.
Traceable is another word for controllable, and so the answer is 10% x 400,000 = 40,0002. You take the present value of the perpetuity of $500 a year (by multiplying by 1/r as usual), and subtract the PV of the annuity which you get by multiplying by the 10 year annuity discount factor.
3. the answer is B.
I do suggest that you watch our free lectures. They are a completely course for Paper F2 and cover everything you need to be able to pass the exam well.
Thanks sir for your reply. I have no problem with Q2 and Q3 now. But for Q1, I still need more explanation from sir.
I actually found this explanation in Acca F5 technical articles
“…. When assessing the performance of a manager we should only consider costs and revenues under the control of that manager, and hence judge the manager on controllable profit. In assessing the success of the division, our focus should be on costs and revenues that are traceable to the division and hence judge the division on traceable profit. For example, depreciation on divisional machinery would not be included as a controllable cost in a profit centre. This is because the manager has no control over investment in fixed assets. It would, however, be included as a traceable fixed cost in assessing the performance of the division.”I don’t really understand this but I feel like there are some differences between traceable and controllable. Correct me if I’m wrong.
The article is correct, and I must admit to having read your first question too quickly.
However, it is very unusual to be asked to calculate the residual income for the division as opposed to the manager – the whole reason for using residual income is to measure the managers performance (not to measure the division itself). Because your question did say the division (not the manager) then the traceable assets are 800,000 + 400,000 and the notional interest would be calculated on this total (although, again, this would be a very unusual thing to be asked).
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