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

Question

C10-1 Calculating Interest and Depreciation Expenses and Effects on Loan Covenant Ratios (Chapters 9 and 10) LO 9-3, LO 9-7,LO 10-2, LO 10-5] Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on Dbr 31, 2015, for $3.0 million, plus 8 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $540,000. ZCC anticipates the following average vehicle use over each year ended December 31 2016 15,000 2018 17,500 20,000 17,500 5,000 To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $2.70 million, with interest paid annually at the market interest rate of 6 percent. The note carries loan covenants that require ZCC to maintain a minimum times interest eamed ratio of 3.0 and a minimum fixed asset tumover ratio of 1.0. ZCC forecasts that the company will generate the following sales and preliminary eanings (prior to recording depreciation on the vehicles and interest on the note). (For purposes of this question, ignore income tax.) Sales Revenue Income before Depreciation and Interest Expense S 3,000 3,500 S 3.800 S 3,900 4,000 1,500 1.700 900 2,000 2.100 Required: 1. Calculate the amount of interest expense that would be recorded each year Answer is complete and correct. $ 162,000 per 2. Calculate the depreciation expense that would be recorded each year, using the following depreciation methods (a) Straight-line Answer is complete and correct. 540,000 pe (b) Double-declining-(Do not round intermediate calculations.) Answer is complete and correct Depreciation 2016 2017 2018 2019 2020 1,296,000 T7,600 466,560 159,840 (c) Units-of production Answer is complete and correct. Depreciation 2016 2017 2018 2019 2020 540,000 720,000 630,000 630,000 180,000

Explanation / Answer

3a) Straight line

Working:

Times interest earned ratio = EBIT / interest payable

Fixed asset turnover ratio = Net sales / fixed assets

3b) Double declining balance

Working

c) Unit of production

Working

Worksheet 2016 2017 2018 2019 2020 Net income $798 $998 $1,198 $1,298 $1,398 Times interest earned ratio 9.26 10.49 11.73 12.35 12.96 Fixed assets turnover ratio 1.11 1.62 2.35 3.61 7.41

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.