In 2020, you purchased a piece of equipment for $125000. You will use the Straight Line Depreciation method and will use a depreciable salvage value of $6,000. The equipment has a depreciable and useful life of five years. The first-year benefit is $20,000 and increases by $5,000 each year thereafter. You sell the equipment at the end of year 5 for a market value of $15000.   You are in the 32% income tax bracket. Ordinary gains/losses are taxed at 18% and capital gains are taxed at 15%.

Answer the following questions:

1. What amount of taxes do you owe (or get refunded) on the depreciation recapture (tax on the sale of the equipment)?
2. What is the value of the After Tax Cash Flow in year 5?
3. What is the After Tax ROR on the investment?
4. If you have a MARR of 10% is this a good investment?

Problem 4

Rent A Car, Inc. (RAC) purchased 100 vehicles on January 1, 2020, spending $2 million plus 11 percent total sales tax for a total cost of $2,220,000. RAC expects to use the vehicles for five years and then sell them for approximately $360,000. RAC anticipates the following average vehicle use over each year ended December 31:

To finance the purchase, RAC borrowed $1.8 million by signing a 6% promissory note.  The note is to be repaid in full by December 31, 2024.  On December 31 of each year, RAC makes one payment on the installment note comprising blended interest and principal components.  The amortization schedule for the note is presented below.  RAC has a December 31 year-end.  The company does not make monthly adjustments, but rather makes adjusting entries every quarter.

The note carries loan covenants that require RAC to maintain a minimum times interest earned ratio of 3.0. RAC 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.

Required:

1. Assuming the company makes the required annual payments on December 31, use the amortization schedule to determine:
   1. The amount of the annual payment                                                           
   2. The total interest and principal paid over the note’s life                           

2. What portion of the Note Payable balance would be reported as current versus noncurrent on the December 31, 2021, balance sheet? Fill-in the two blanks below.

Note Payable, Current $                                              

Note Payable, Noncurrent                                          

3. Calculate the depreciation expense that would be recorded in 2020 and 2021, using the (a) straight-line, (b) double-declining balance, and (c) units-of-production depreciation method. [5 marks]

                                                                                                2020                            2021    

a) straight line:

b) double-declining balance:

c) units-of-production:

4. Using the information provided and your answers to requirement 3, determine net income and the loan covenant ratio in 2020 and 2021, assuming the company chooses the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method. [6 marks]

                                                                                                2020                            2021    

a) straight line:

Net Income =

Times Interest Earned Ratio =

b) double-declining balance:

Net Income =

Times Interest Earned Ratio =

c) units-of-production:

Net Income =

Times Interest Earned Ratio =

5. Using your answers to requirement 4, indicate whether the loan covenant would be violated under the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method.
6. If the loan covenant is violated at any point in requirement 5, what can the company do to make sure they are not offside?

Carla Vista Corp.’s net income for 2020 is $140,600. The only potentially dilutive securities outstanding were 1,000 call options issued during 2019, with each option being exercisable for one share at $16. None have been exercised, and 28,700 common shares were outstanding during 2020. The average market price of the company’s shares during 2020 was $20.

QUESTIONS:

A) Calculate diluted earnings per share for the year ended December 31, 2020.

B) Assuming that the 1,000 call options were instead issued on November 1, 2020 (rather than in 2019), calculate diluted earnings per share for the year ended December 31, 2020. The average market price during the last two months of 2020 was $20.

On 1 March 2020, goods valuing $1000 were bought from Mr. D.

On 15 March 2020, goods, valued at $200, returned to Mr. D .

On 1 May 2020, goods for $2000 were sold to Mr. E.

On 15 May 2020, Mr. E returned goods, valued at $500, to the business.

On 1 June 2020, goods, valued at $600, were bought from Mr. Z on credit.

On 15 June 2020, the due amount of $800 was paid to Mr. D through cheque.

On 15 July 2020, the due amount of $1500 was received from Mr. E through cheque.

Draw the T account of Purchases, Sales, Mr. D, Mr. E, Return inwards, Return outwards, Mr. Z and Bank.

Question 1
IAS 10: Events after the Reporting Period addresses two issues: adjusting events, namely, those events that provide evidence of conditions that existed at the end of the reporting period and non-adjusting events: which are those events that are indicative of conditions that arose after the reporting period that need to be reflected in the financial statements. Amounts recognized in the financial statements are adjusted to reflect adjusting events, but only disclosures are required for material non-adjusting events. Management’s judgment is required in determining whether events that took place after the end of the reporting period are adjusting or non-adjusting events. This will be highly dependent on the reporting date and the specific facts and circumstances of each company’s operations. Coronavirus has overwhelmed the world in various ways and at various times. China was the first to announce spread of the virus in November, 2019. UK announced its first case of coronavirus in February, 2020 and Ghana announced its first case in March, 2020. While company A resides in China, company B resides in the UK and C resides in Ghana. Company A’s financial reporting period ends on 31st October each year; company B’s financial reporting period ends on 31st December, each year and company C’s financial reporting period ends on the 31st of March each year. Management of these companies may need to continually review and update the assessments up to the date the financial statements are issued given the fluid nature of the crisis and the uncertainties involved.
You are required to discuss in respect of each of the companies, the potential management conclusions of the impact of the coronavirus on end of year reporting, mindful of IAS 10.
Total Marks: 20marks

The following information relates to Kamelwa limited a retail grocer engaged in
buying and selling of foodstuffs.
(1) Budgeted sales (2021) : January K500,000
February K450,000
March K625,000
April K700,000
May K665,500
June K781,000
July K718,750
August K593,750
September K812,500
October K780,000
November K850,000
December K1,020,000
January (2022) K620,000(2) Kamelwa limited sells its purchases at cost plus 25% mark- up.
(3) Kamelwa has a policy to hold inventory at the end of each month which is
sufficient to meet sales demand in the next half month. Sales are budgeted to
occur evenly during each month.
(4) Purchases are paid for in the following manner: 50% in the month of purchase
and the remainder in the month after purchase.
(5) Sales are 85% on credit basis and 15% cash basis.
Credit sales are collected as follows: 60% in the month following the sale;
20% the second month after the sale and 20 % the third month after the sale.
(6) Labour is remunerated at 10% of cost of sales and is paid for in the month
that it is incurred.
(7) Overheads incurred in the production department are 70% of labour cost.
These overheads are paid 30% in the month they are incurred and the
balance the following month.
(8) An auction sale conducted on 29 December 2020 resulted into disposal of
property worth K600,000 which amount (cash) will be collected on 29 January
2021.
(9) The company will pay the last company tax balance for the period 2020 on 30
June 2021 amounting to K85,000.
REQUIRED
(a) Prepare Kamelwa’s limited cash budget for the year 2021.
(b) Discuss the circumstances under which each of the following budgets might
be used .
- Rolling budget
- Zero based budget ( 6 marks)