Zoom Car Corporation (ZCC) plans to purchase approximately 100 vehicles on December 31, 2017, spending $2 million plus 11 percent total sales tax. ZCC expects to use the vehicles for five years and then sell them for approximately $420,000. ZCC anticipates the following average vehicle use over each year ended December 31:

To finance the purchase, ZCC signed a five-year promissory note on December 31, 2017, for $1.8 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.

Required:

1. Calculate the amount of interest expense that would be recorded each year.

2. Calculate the depreciation expense that would be recorded each year, using the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method.

3. Using your answers to requirements 1 and 2, determine net income and the two loan covenant ratios in each year, assuming the company chooses the (a) straight-line, (b) double- declining-balance, and (c) units-of-production depreciation method.

4. Using your answers to requirement 3, indicate whether the loan covenants would be violated under the (a) straight-line, (b) double-declining-balance, and (c) units-of-production depreciation method.

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2022 2021 2018 2019 2020 Kilometres per year 5,000 15,000 20,000 10,000 10,000 (in thousands) 2018 2021 2019 2020 2022 Sales Revenue $2,000 $2,500 $2,800 $2,900 $3,000 Income before depreciation and interest expense 1,000 1,200 1,400 1,500 1,600