Chapter 10 HW .> C | ezto.mheducation.com/hm.tpx C10-1 Calculating Interest and

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Chapter 10 HW .> C | ezto.mheducation.com/hm.tpx C10-1 Calculating Interest and Depreclation Expenses and Effects on Loan Covenant Ratlos (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 December 31, 2015, for $2 6 million, plus 9 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $494,000. ZCC anticipates the following average vehicle use over each year ended December 31: 2019 19,000 2020 5,000 Miles per year 15.000 20,000 19,000 To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $2.34 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 ratio of 1.0. 2CC forecasts that the company will generate the following sales and preliminary earnings prior to recording depreciation on the vehidles 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 20192020 5 2,600 3,100 S 3,400 3,500 3,600 1,300 1,500 ,700 8001900 Required: 1. Calcuate the amount of interest expense that would be recorded each year per year 2. Calculate the depreciation expense that would be recorded each year, using the folowing depreciation methods per year 6:09 PM O Type here to search ^ E)Js 11/28/2017

Explanation / Answer

1) Calculation of the amount of interest expense each year = Loan amount*Rate of interest

= $2,340,000*6% = $140,400 per year

2) a) Calculation of Depreciation expense per year using straight line method

= (Cost of Purchase-Salvage Value)/Useful life of asset

Cost of Purchase = $2,600,000+(9% sales tax on $2,600,000) = $2,600,000+$234,000 = $2,834,000

Salvage Value = $494,000

Useful Life = 5 years

Depreciation expense per year = ($2,834,000-$494,000)/5 years = $468,000 per year

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