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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]

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 10-5J Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31 2015, for $1.9 million, plus 10 percent total sales tax. ZCC expects to use the vehicles for 5 years and then sell them for approximately S380,000. ZCC anticipates the following average vehicle use over each year ended December 31 2016 2017 2018 2019 2020 Miles per year 14,000 18,000 10,000 10,000 5,000 To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $1.71 million, with interest paid annually at the market interest rate of 5 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.) (in 000s) 2016 2017 2018 2019 2020 Sales Revenue 1,900 2,400 2,700 2,800 2,900 1,350 Income before Depreciation and Interest Expense 950 1,150 1,450 1,550 Required 1. Calculate the amount of interest expense that would be recorded each year. Answer is complete and correct 85,500 per year terest Expense 2. Calculate the depreciation expense that would be recorded each year, u sing the following depreciation methods: (a)Straight-line Answer is complete and correct aight-line Depreciation 342,000 per year (b) Double-declining-balance (Do not round intermediate calculations Answer is complete but not entirely correct Depreciation Expense 836,000 2016 501,600 2017 300,960 2018 180,576X 2019 108,346X 2020