URGENT NEED HELP!! Zoom Car Corporation (ZCC) plans to purchase approximately 10
ID: 2532914 • Letter: U
Question
URGENT NEED HELP!!
Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2015, for $2.3 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $460,000. ZCC anticipates the following average vehicle use over each year ended December 31:
Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2015, for $2.3 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $460,000. ZCC anticipates the following average vehicle use over each year ended December 31:
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 $2.3 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $460,000. ZCC anticipates the following average vehicle use over each year ended December 31: 2016 15,000 2020 5,000 Miles per year 20,000 14,500 To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $2.07 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 earned ratio of 3.0 and a minimum fixed asset tumover (prior to recording depreciation on the vehicles and interest on the note). (For purposes of this question, ignore income tax.) in 000s) Sales Revenue Income before Depreciation and Interest Expense 2016 2017 2018 2019 2020 S 2,300 $ 2,800 $3.100 $3,200 $3,300 1,150 30 550 1,650 1,750Explanation / Answer
The question is very long with each part having multiple sub-parts with calculations for multiple years. I was able to complete Part b) and c) of Part and Part a) of Part 2) within the available time.
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1)
Part b)
The depreciation under double declining method is calculated as follows:
Double Declining Depreciation Rate = (1/Estimated Life)*2 = (1/5)*2 = 40%
Now, we can calculate depreciation for each year as below:
Depreciation Expense (2016) = Cost*Depreciation Rate = 2,530,000*40% = $1,012,000
Depreciation Expense (2017) = (Cost - Depreciation for 2016)*Depreciation Rate = (2,530,000 - 1,012,000)*40% = $607,200
Depreciation Expense (2018) = (Cost - Depreciation for 2016 - Depreciation for 2017)*Depreciation Rate = (2,530,000 - 1,012,000 - 607,200)*40% = $364,320
Depreciation Expense (2019) = (Book Value at the End of Year 2018 - Estimated Salvage Value) = (2,530,000 - 1,012,000 - 607,200 - 364,320) - 460,000 = $86,480
Depreciation Expense (2020) = $0 (No depreciation would be recorded as the net book value in 2019 was adjusted to bring it down to the salvage value of $460,000)
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Part c)
The value of depreciation expense for each year under units-of-production method is calculated as follow:
Cost Per Mile = (Cost - Salvage Value)/Total Miles = (2,530,000 - 460,000)/(15,000 + 20,000 + 14,500 + 14,500 + 5,000) = $30 per mile
Now, we can calculate depreciation expense for each year as below:
Depreciation Expense (2016) = Miles for 2016*Cost Per Mile = 15,000*30 = $450,000
Depreciation Expense (2017) = Miles for 2017*Cost Per Mile = 20,000*30 = $600,000
Depreciation Expense (2018) = Miles for 2018*Cost Per Mile = 14,500*30 = $435,000
Depreciation Expense (2019) = Miles for 2019*Cost Per Mile = 14,500*30 = $435,000
Depreciation Expense (2020) = Miles for 2020*Cost Per Mile = 5,000*30 = $150,000
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2)
a) Straight Line:
Straight Line Depreciation Expense Each Year = (Cost - Salvage Value)/Estimated Life = (2,530,000 - 460,000)/5 = $414,000
Interest Expense Each Year = Loan Amount*Interest Rate = 2,070,000*6% = $124,200
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The value of net income for each year is derived as below:
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The times interest earned ratio for each year is determined as follows:
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The fixed asset turnover ratio for each year is calculated as follows:
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The summary table is provided as below:
2016 2017 2018 2019 2020 Income before Depreciation and Expense 1,150.0 1,350.0 1,550.0 1,650.0 1,750.0 Less Depreciation 414.0 414.0 414.0 414.0 414.0 Interest Expense 124.2 124.2 124.2 124.2 124.2 Net Income $611.8 $811.8 $1,011.8 $1,111.8 $1,211.8Related Questions
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