Funky Coffee (Pty) Ltd is a chain of coffee shops focusing on sustainably sourced coffee beans....

  

 

Transcribed Image Text:

Funky Coffee (Pty) Ltd is a chain of coffee shops focusing on sustainably sourced coffee beans. It serves ready-made coffee, and it also sells the beans. It is loved by the local communities, as it provides flavoured coffees, for example, cinnamon, vanilla, chocolate etc. It has five retail outlets around South Africa. To fund the opening of two further shops, the company received a five-year loan from its bank. This is in addition to its existing debt. The bank has put some debt covenants in place to secure the company's debt. Below is Funky Coffee's forecast Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 2024: Profit before interest and tax Interest expense Profit before tax Taxation Profit after tax 2024 R 950 000 200 000 750 000 210 000 540 000 Additional information: ● Existing borrowings are R1 million and forecast to be in place all year. New borrowings of R2 million are forecast to be raised from 1 October 2023. The interest rate charged on all the loans was forecast to be 10% per annum. The tax rate is 28%. Ordinary shares in issue all year were 1 200 000. Required: 1 Identify and explain one (1) possible loan covenant in the context of Funky Coffee. Also provide an example of how such a covenant could be applied to Funky Coffee. 2 Interest rates are expected to rise to 12% per annum on all the company's bank loans. Restate Funky Coffee's forecast Statement of Profit or Loss and Other Comprehensive Income for the year ending 31 March 2024, assuming the new interest rates are in effect all year. 3 When working with the accounting equation, one must determine whether a debit entry is an asset or an expense. Explain the difference between an asset and an expense and provide an example of each within your explanation. Funky Coffee (Pty) Ltd is a chain of coffee shops focusing on sustainably sourced coffee beans. It serves ready-made coffee, and it also sells the beans. It is loved by the local communities, as it provides flavoured coffees, for example, cinnamon, vanilla, chocolate etc. It has five retail outlets around South Africa. To fund the opening of two further shops, the company received a five-year loan from its bank. This is in addition to its existing debt. The bank has put some debt covenants in place to secure the company's debt. Below is Funky Coffee's forecast Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 2024: Profit before interest and tax Interest expense Profit before tax Taxation Profit after tax 2024 R 950 000 200 000 750 000 210 000 540 000 Additional information: ● Existing borrowings are R1 million and forecast to be in place all year. New borrowings of R2 million are forecast to be raised from 1 October 2023. The interest rate charged on all the loans was forecast to be 10% per annum. The tax rate is 28%. Ordinary shares in issue all year were 1 200 000. Required: 1 Identify and explain one (1) possible loan covenant in the context of Funky Coffee. Also provide an example of how such a covenant could be applied to Funky Coffee. 2 Interest rates are expected to rise to 12% per annum on all the company's bank loans. Restate Funky Coffee's forecast Statement of Profit or Loss and Other Comprehensive Income for the year ending 31 March 2024, assuming the new interest rates are in effect all year. 3 When working with the accounting equation, one must determine whether a debit entry is an asset or an expense. Explain the difference between an asset and an expense and provide an example of each within your explanation.

Answer rating: 100% (QA)

1 Loan Covenant for Funky Coffee One possible loan covenant that the bank might impose on Funky Coffee could be a Debt Service Coverage Ratio DSCR cov... View the full answer