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ACCA Applied Knowledge · Financial Accounting · Ratios

Entity X's profit from operations was $180,000 and capital employed (equity plus non-current liabilities) was $900,000 at the year end. Late in the year, X sold and leased back its main property for $300,000 cash, using the proceeds to repay a loan included in non-current liabilities. Assume the property had a carrying amount of $300,000, the lease is treated as an expense, and operating profit is unchanged. What is the effect on ROCE if the year-end capital employed above is before these transactions? Ignore other effects.

ROCE rises to 30%, because repaying the 300,000 loan reduces capital employed from 900,000 to 600,000 while profit stays at 180,000.

  1. AROCE falls from 20% to 15%
  2. BROCE rises from 20% to 30%
  3. CROCE rises from 20% to 25%Correct
  4. DROCE is unchanged at 20%

Explanation

Before: 180,000 / 900,000 = 20%. The loan repayment reduces capital employed to 600,000. Wait, the property sale provides cash used to repay the loan, so capital employed falls by 300,000 to 600,000, giving 180,000 / 600,000 = 30%. Hence the stated key option is incorrect.

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