C10-1 Calculating Interest and Depreciation Expenses and Effects on Loan Covenan

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C10-1 Calculating Interest and Depreciation Expenses and Effects on Loan Covenant Ratios (Chapters 9 and 10) [LO 9. Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2015, for $1.6 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $320,000. ZCC anticipates the following average vehicle use over each year ended December 31 2016 2017 15,000 2018 4,000 2019 4,000 2020 5,000 20,000 with interest paid annually at the market interest rate of 5 percent. The note carries loan covenants that require ZCC to maintain a ratio of 1.0. ZCC forecasts that the company will generate the following sales and preliminary earnings (prior to recording depreciation on the vehicles and interest on the note). (For purposes of this question ignore income tax.) m times interest eamed ratio of 3.0 and a minimum fixed asset turnover (in 000s) Sales 2016 2017 2018 2019 2020 $ 1,600 2,100 $ 2,400 $2,500 $2,600 800 1,000 1,200 1,300 1,400 Required 1. Calculate the amount of interest expense that would be recorded each year s 72,000 per year that would be recorded each year, using the following depreciation 2. Calculate the depreciation expense ht-line D

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Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. 2. Depreciation Straight Line Method 288000 Value of Asset 1600000 add: 10% Sales Tax 160000 Total Cost 1760000 Less:Salvage Value 320000 Depreciable Value 1440000 Life 5 Year Hence rate is 20% Depreciation 288000 1440000/5 Double Declining 40% rate 2016 2017 2018 2019 2020 Book Value 1760000 1056000 633600 380160 228096 Less Dep 40% 704000 422400 253440 152064 68096 1600000-total dep Closing Book Value 1056000 633600 380160 228096 160000 Units of production Total Dep 320000*5=1600000 Average Use Depreciation 2016 15000 500000 1600000/48000*15000 2017 20000 666667 1600000/48000*20000 2018 4000 133333 1600000/48000*4000 2019 4000 133333 1600000/48000*4000 2020 5000 166667 1600000/48000*5000 48000 1600000 Straight Line 2016 2017 2018 2019 2020 Turnover 1600000 2100000 2400000 2500000 2600000 Income before interest and Dep 800000 1000000 1200000 1300000 1400000 Depreciation 320000 320000 320000 320000 320000 Interest (1440000*5%) 72000 72000 72000 72000 72000 Net Income 408000 608000 808000 908000 1008000 Time Interest Earned Ratio EBIDTA/Interes payable 1.96 1.64 1.49 1.43 1.39 Book Value of Fixed Asset 1760000 1760000 1440000 1120000 800000 480000 Depreciation (Given) 0 -320000 -320000 -320000 -320000 -320000 Book Value 1760000 1440000 1120000 800000 480000 160000 Average Book Value 1600000 1280000 960000 640000 320000 Fixed Asset Ratio=Turnover/Average Fixed Asset 1.00 1.64 2.50 3.91 8.13 Double Declining 2016 2017 2018 2019 2020 Turnover 1600000 2100000 2400000 2500000 2600000 Income before interest and Dep 800000 1000000 1200000 1300000 1400000 Depreciation 704000 422400 253440 152064 68096 Interest (1440000*5%) 72000 72000 72000 72000 72000 Net Income 24000 505600 874560 1075936 1259904 Time Interest Earned Ratio EBIDTA/Interes payable 33.33 1.98 1.37 1.21 1.11 Book Value of Fixed Asset 1760000 1760000 1056000 633600 380160 228096 Depreciation (Given) 0 -704000 -422400 -253440 -152064 -68096 Book Value 1760000 1056000 633600 380160 228096 160000 Average Book Value 1408000 844800 506880 304128 194048 Fixed Asset Ratio=Turnover/Average Fixed Asset 1.14 2.49 4.73 8.22 13.40 Unit production 2016 2017 2018 2019 2020 Turnover 1600000 2100000 2400000 2500000 2600000 Income before interest and Dep 800000 1000000 1200000 1300000 1400000 Depreciation 500000 666666.6667 133333.33 133333.33 166666.67 Interest (1440000*5%) 72000 72000 72000 72000 72000 Net Income 228000 261333.3333 994666.67 1094666.7 1161333.3 Time Interest Earned Ratio EBIDTA/Interes payable 3.51 3.83 1.21 1.19 1.21 Book Value of Fixed Asset 1760000 1760000 1260000 593333.33 460000 326666.67 Depreciation (Given) 0 -500000 -666667 -133333 -133333 -166667 Book Value 1760000 1260000 593333.3333 460000 326666.67 160000 Average Book Value 1510000 926666.6667 526666.67 393333.33 243333.33 Fixed Asset Ratio=Turnover/Average Fixed Asset 1.06 2.27 4.56 6.36 10.68

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