Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on Decem
ID: 2471401 • Letter: Z
Question
Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2015, for $1.7 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $340,000. 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 $1.7 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately $340,000. ZCC anticipates the following average vehicle use over each year ended December 31: 2016 15,000 2017 20,000 2018 5,500 2019 5,500 2020 5,000 Miles per year To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $1.53 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 turnover 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.) 2016 2019 (in 000s) Sales Revenue 2020 $ 1,700 $ 2,200 $2,500 $ 2,600 $2,700 1,450 2017 2018 Income before Depreciation and Interest Expense 850 1,050 1,250 1,350 Required: 1. Calculate the amount of interest expense that would be recorded each year. Interest Expense $ 91,800 per year 2. Calculate the depreciation expense that would be recorded each year, using the following depreciation methods: (a) Straight-line Straight-line Depreciation per yearExplanation / Answer
1
Calculation of Amount of Interest Expense:
Interest Expense = Loan Amount * Interest Rate
= 1,530,000 *6% =
$ 91,800.00
Per Year
2
Calculation of Depreciation expense using straight line method:
formula:
Depreciation = (Cost - Salvage Value ) / Life =
$ 306,000
Per Year
= ((1700000+1700000*10%)-340000) / 5
3
Calculation of Depreciation expense using double declining balance method:
Formula:
Depreciation = Previous Book Value * 2 / Life
Year
Previous Book Value
Depreciation
2016
$ 1,870,000.00
$ 748,000.00
(1700000+1700000*10%)
(1870000*2/5)
2017
$ 1,122,000.00
$ 448,800.00
(1870000-748000)
(1122000*2/5)
2018
$ 673,200.00
$ 269,280.00
(1122000-448800)
(673200*2/5)
2019
$ 403,920.00
$ 161,568.00
(673200-269280)
(403920*2/5)
2020
$ 242,352.00
$ 96,940.80
(403920-161568)
(242352*2/5)
4
Calculation of Depreciation expense using Units of Production method:
Formula :
Depreciation = (Cost - Salvage value ) * Miles Driven in the year / Total Life in Miles
Year
Cost - Salvage Value
Miles Driven
Total Life in Miles
Depreciation
(1700000+1700000*10%)-340000)
A
B
C
A*B/C
2016
1530000
15000
51000
$ 450,000
2017
1530000
20000
51000
$ 600,000
2018
1530000
5500
51000
$ 165,000
2019
1530000
5500
51000
$ 165,000
2020
1530000
5000
51000
$ 150,000
Total
51000
1
Calculation of Amount of Interest Expense:
Interest Expense = Loan Amount * Interest Rate
= 1,530,000 *6% =
$ 91,800.00
Per Year
2
Calculation of Depreciation expense using straight line method:
formula:
Depreciation = (Cost - Salvage Value ) / Life =
$ 306,000
Per Year
= ((1700000+1700000*10%)-340000) / 5
3
Calculation of Depreciation expense using double declining balance method:
Formula:
Depreciation = Previous Book Value * 2 / Life
Year
Previous Book Value
Depreciation
2016
$ 1,870,000.00
$ 748,000.00
(1700000+1700000*10%)
(1870000*2/5)
2017
$ 1,122,000.00
$ 448,800.00
(1870000-748000)
(1122000*2/5)
2018
$ 673,200.00
$ 269,280.00
(1122000-448800)
(673200*2/5)
2019
$ 403,920.00
$ 161,568.00
(673200-269280)
(403920*2/5)
2020
$ 242,352.00
$ 96,940.80
(403920-161568)
(242352*2/5)
4
Calculation of Depreciation expense using Units of Production method:
Formula :
Depreciation = (Cost - Salvage value ) * Miles Driven in the year / Total Life in Miles
Year
Cost - Salvage Value
Miles Driven
Total Life in Miles
Depreciation
(1700000+1700000*10%)-340000)
A
B
C
A*B/C
2016
1530000
15000
51000
$ 450,000
2017
1530000
20000
51000
$ 600,000
2018
1530000
5500
51000
$ 165,000
2019
1530000
5500
51000
$ 165,000
2020
1530000
5000
51000
$ 150,000
Total
51000
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