Question

You are a staff accountant at a confectionary company, Philly Chocolates International (“the Company” or PCI). The lease on the current multifunction copiers the Company has in its headquarters is almost up. PCI has decided to replace the current copiers with Canon imageRunnerAdvanceC55501 copiers. The CFO has asked you to investigate the impact to the financial statements over the next five years if PCI buys the copiers for cash. The following is the information you have been able to gather so far.

• The copiers cost $9,190 each and PCI will need 15 copiers.
• The local dealer is willing to offer credit terms of 2/15, net 45 on the purchase. PCI usually takes advantage of such discounts.
• The copiers have an estimated useful life of 5 years and a projected salvage value of $900 each. PCI depreciates similar assets using the double declining balance and nearest month methods.
• Based on its research, PCI’s tech department estimates that repairs and maintenance on the new copiers will be minimal the first two years while they are under warranty and increase steadily over the remaining useful lives. They have provided you with the following estimates.

         R&M Cost

Year       (per copier)

2018. $ 50
2019. $200
2020. $300
2021. $500
2022. $500
2023. $500

Assignment

Prepare a set of schedules for the CFO summarizing the impact to the balance sheet and income statement over the next five years of buying 15 Canon imageRunnerAdvanceC55501 copiers as well as projected costs as outlined above. Note assume the College purchases the copiers on October 31, 2018 and pays for repairs and maintenance with cash. To support your analysis you should include the following supporting schedules:

1. A table summarizing the balance sheet and income statement impact in each of the five years
2. Using Hershey’s 3^rd Quarter 2018 financial statements, project the year-end 2018 balances with and without this transaction. What would Asset Turnover, Profit Margin on Sales, and Return on Assets be with and without this transaction?

Answer 1

Credit of 2/15, net 45 means the discount of 2% is allowed, if the payment is made within 15 days and without any discount can be made within 45 days.As stated in the question, PCI usually takes the advantage of such discounts, the total amount spent on the purchase of 15 copiers are as under:-

Total Cost= Cost of each copier * No. of copiers

= $9190 * 15 = $137850

After discount, the amount spent would be:- $137850 - 2%(137850)= $ 135093

The company is following Double declining balance method. The beginning book value of the asset is $135093. The salvage value is $900 each which meant $13500 for 15 copiers. The total depriciable amount for the life of the asset is the difference between beginning book value and salvage value that is $(135093-13500)= $ 121593. The estimated useful life is 5 years.

The annual depriciation rate would be (100% / 5years = 20%), but we are following double declining rate of depriciation so we will multiply the beginning book value with twice the annual depriciation rate i.e 40%. The depriciation expense for five years is as follows:- (Assuming the depriciation for the full year)

Year1 Year2 Year3 Year4 Year5

Beginning Book value $135093 $81056 $48634 $29180 $17508

Depriciation expense $(54037) $(32422) $(19454) $(11672) $(4008)

Ending Book Value $81056 $48634 $29180 $17508 $13500

In year 5, the balance would shift and the accelerated approach would have only $4008 of depriciation.

A)

Now, as asked in in question, the extract of Income statement and Balance sheet over the five years are as follows:-

INCOME STATEMENT    Year1 Year2 Year3 Year4 Year5

Sales - - - - -

Expense Cost(15 copier)       (750) (3000) (4500) (7500) (7500)

Fixed Asset Cost (54037) (32422) (19454) (11672) (4008)

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Net Profit/ (Loss) (54787) (35422) (23954) (19172) (11508)

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BalanceSheet ( Extract) Year1 Year2 Year3 Year4 Year5

Fixed Asset $135093 $135093 $135093 $135093 $135093

Accumulated Depriciation (54037) (86459) (105913) (117585) (121593)

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NET BOOK Value $81056 $48634 $29180 $17508 $13500

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b) For computing the Asset Turnover ratio, Divide the net sales or revenue by the average total assets. In this question, revenue or total sales of the company is not provided so it cannot be computed. Also, Profit margin on sales cannot be computed without sales figure.

Return on assets means net income divided by total assets. Since the sales figures are not provided in question, we are getting net loss as shown above, so this also cannot be computed.