15. 0.52 points C10-1 Calculating Interest and Depreciation Expenses and Effects

Question

15. 0.52 points 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) 100 vehicles on December 31, 2015, for se ap $2.2 milion, plus 10 percent total sales tax. ZCC expects to use the vehicdles for 5 years and then sell 2016 15,00020,000 20172018 13,000 13,000 5,000 To finance the purchase, mition, with interest paid annually at the market interest rate of 5 percent. The note carries loan fxed asset purposes of this question, ignore income tax.) ZCC signed a 5-year promissory note on that the company will generate the following sales and ratio of 1.0. zCC s (prior to recording depreciation on the vehicles and interest on the note). (For ry earming 20162017 201820192020 S 2,200 $ 2,700 $3,000 $3.100 $3,200 1.100,300 1.500 1,600700 Revenue (a) Straight-line

Explanation / Answer

1. Calculation of interest amount per year

Company signed a 5 year promisory note of $1.98 million at market interest rate of 5%. Interest to be paid annually. Therefore interest to be recorded each year = %1.98 million * 5%= $ 99,000

2(a). Depreciation under Straight line

Depreciation = (cost of machinery- salvage value)/ estimated usefull life of machinery

= ($2.2 million + 10%* $2.2 million- $4,40,000)/5 = $19,80,000/5 = $3,96,000

2(b). Depreciation under double declining balance

Depreciation Rate = 1/usefull life*200% = (1/5)*200% = 40%

*Book value cant be less than residual value. Hence depreciation calculation will stop from here.

2(c). Depreciation under unit of production method:

Cost of asset after adjustment of residual value = $ 19,80,000 (calculated in answer 1 above)

Total miles used = 66,000. Therefore cost per mile = $19,80,000/66,000= $ 30

Year wise depreciations are as below:

Year Value at begginning of year Depreciation Rate Depreciation Book Value 2016 2,420,000.00 40% 968,000.00 1,452,000.00 2017 1,452,000.00 40% 580,800.00 871,200.00 2018 871,200.00 40% 348,480.00 522,720.00 2019 522,720.00 40% 82,720.00(*) 440,000.00 2020 440,000.00 40% 0.00 0.00

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