Ceramix is a company which produces household items. The company is divided into two departments (plates and mugs), which are run as investment centres.
accounting
Description
Assignment 1 – Advanced Management Accounting
Ceramix is a
company which produces household items. The company is divided into two
departments (plates and mugs), which are run as investment centres. The performance
of the heads of these two departments is measured and rewarded purely on the
basis of return on investment (ROI). Ceramix’s cost of capital is 5%.
The chief
executive of Ceramix has provided you with the following projections which relate
to the current financial year.
|
|
Plates |
Mugs |
|
Operating profit |
£223,000 |
£65,000 |
|
Non-current Assets (cost) |
£1,900,000 |
£800,000 |
|
Non-current assets
(accumulated depreciation) |
£1,100,000 |
£200,000 |
|
Current assets less current
liabilities |
£50,000 |
£16,000 |
Required:
a.
Calculate
the return on investment for each of the two department as well as for the
entire company.
b.
The
head of the plates department is considering buying a new machine at the start
of the next financial year, which would increase his department’s contribution
by £71,000. The machine would cost £600,000 and depreciate over 20 years, with
an assumed resale value of zero. The machine would replace an older machine,
which would be sold for £35,000. Its book value at the start of the next
financial year is £30,000. If the plates department does not invest in the new
machine and keeps the old one instead, the old machine would depreciate by
£7,500 over the next financial year.
Calculate the
plates department’s ROI for the next financial year assuming that it buys the
new machine. Given Ceramix’s performance measurement and reward regime, would
you expect the head of the plates department to go ahead with the purchase?
Assignment 2 – Advanced Financial Accounting
On 1 January
2019, Wings plc enters into a six-year contract to lease an airplane. Annual
payments under the contract amount to £100,000 and are paid at the end of each
year. The contract also includes annual maintenance for the aircraft.
Separately, annual lease payments and annual maintenance payments would amount to
£95,000 and £11,000, respectively. Wings plc incurred initial direct costs of
£5,000. The interest rate implicit in the lease is 6% per annum.
Required:
a.
Calculate
the lease liability at the commencement of the lease.
b.
Calculate
the carrying amount of the right of use asset on inception of the lease, as
well as the annual depreciation charge
c.
Prepare
extracts from Wings plc’s financial statement for the financial year ended 31
December 2019 to show how the lease is accounted for.
