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C10-1 Calculating Interest and Depreciation Expenses and Effects on Loan Covenant Ratios (Chapters 9 and...

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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] Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2015, for $1.1 million, plus 10 percent total sales tax. zcc expects to use the vehicles for 5 years and then sell them for approximately $220,000. zcC anticipates the following average vehicle use over each year ended 2016 10,000 2017 10,000 2018 5,000 2019 5,000 Miles per year 3,000 To finance the purchase, ZCC signed a 5-year promissory note on December 31, 2015, for $.99 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.) (in 000s) Sales Revenue Income 2016 2017 2018 2019 2020 S 1.100 $1,600 S1,900 2,000 $2,100 950 1,050 1,150 before Depreciation and Int erest Expense 550 750

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