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Shaheed Zulfikar Ali Bhutto Institute of Science & Technology, Karachi

FINANCE

FINANCE 101

Memon Tours and Picnic were in Rent a Car Business. They were having different vehicles for Picnic and Tour.

Question

Memon Tours and Picnic were in Rent a Car Business. They were having different vehicles for Picnic and Tour. They do provide private contractual service for Family Picnic and Tours on Weekends and some of their vehicles were running on Careem and Uber on Weekdays. Following is the list of Vehicles as on December 2019 along with their date of Purchase, Cost and Accumulated Depreciation till Dec. 2019.

Name of Vehicle Type Cost Accumulated Depreciation Date of Purchase

Honda Vamos Hobio 2012 Family Van 1,200,000 300,000 01-07-2017

Nissan Clipper Axis 2015 Family Mini Van 1,500,000 250,000 01-10-2016

Toyota Hiace 2019 Family Van 6,000,000 900,000 01-01-2019

Suzuki Swift 2018 DLX Family Car 2,000,000 250,000 01-03-2019

Toyota Aqua 2014 S Family Car 1,500,000 600,000 15-05-2016

This Toyota Hiace was bought on Prime Minister Youth Loan Scheme and was finance via JS Bank. Debt was 50% at start of Loan and till March 2020, outstanding Bank Loan was amounting to Rs. 2,500,000.

Due to CoVid 19, situation business of Memon Tours and Picnic was severely affected and there was not enough cashflow to pay Bank Obligation. March 2020 was tough for the Rental Car business due to government restrictions on Large Gathering and Outing. However, this CoVid 19 situation was providing an opportunity of getting involved in Supply Chain of Food and Medicine. To get in Supply Chain, business was in need of Delivery Trucks instead of Family Van/Cars. Hence business was considering following two options for survival:

Option 1: Three of Cars (i.e. Honda Vamos 2012, Nissan Clipper 2015 and Toyota Aqua 2014) may be sold. There was a buyer for these three who was ready to pay a lumpsum of 3 Million. Hence Bank Loan will be paid off easily and additional cash may be used for coming month uncertainty.

Option 2: Honda Vamos 2012 and and Nissan Clipper 2015 may be exchanged with Two Brand New K01 (Mini Pickup Truck). The Cost of Each MiniTruck was Rs. 1,065,000. For the purpose of involving in Supply Chain of Medicine and Foods item in CoVid 19. The TradeIn Allowance for Both traded in Car was 2.5 Million. (A Good enough amount to settle the Bank Installment amount of Two months along with some cash for emergency/uncertainty of coming months).

Required:

2a) Prepare Journal Entry of Sale (Option1) along with necessary Calculation

2b) Prepare Journal Entry of Exchange (Option 2) along with necessary Calculation.

Note: Assume Straight Line Method of Depreciation with 10 years of Life for all vehicles. Both Option 1 and Option 2 were of Date April 1, 2020. Hence consider Depreciation of 3 Months accordingly)