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 each Year (per copier)

2018 $ 50

2019 $200

2020 $300

2021 $500

2022 $500

2023 $500

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:

a. A table calculating depreciation expense over the life of the copiers.

b. A table calculating repairs and maintenance expense over the next five years

c. A schedule of the related journal entries in each of the five years

d. A table summarizing the balance sheet and income statement impact in each of the five years

e. 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

ANSWER:

Credit of 2/15, net 45 means the entity is allowed 2% discount if payment is made within 15 days, else entire payment be made within 45 days. As Philly Chocolates International takes advantage of  such discounts, the total amount spent on purchase of 15 copiers is ($9190*15*0.98) i.e. $135,093.

Now, Annual Depreciation per copier = (Cost - residual value)/useful life

= [(9190*0.98) - 900 ] / 5

= 1621.24

Annual Depreciation rate as per Double Declining Method = (1621.24/9006.2) * 2

= 36%

(a). Schedule with Annual Depreciation

Year-end	Asset Value	Depreciation(36%)	Remaining Value (Asset Value less accumulated depreciation)
1	135093	48633.48	86459.52
2	135093	48633.48	37826.04
3	135093	24326.04	13500
4	-	-	13500
5	-	-	13500

(b).

Annual Repair and Maintenance
Year	R&M ($) per copier		No. of Copiers	Total expense
2018	50		15	750
2019	20		15	300
2020	300		15	4500
2021	500		15	7500
2022	500		15	7500
2023	500		15	7500
				28050

(c). Journal Entries

2018		Copiers A/c               Dr			135093
		To Bank A/c			135093
		(Being 15 copiers purchased)
		Repairs & Maintenance A/c      Dr			750
		To Cash A/c			750
		(Being annual R&M expenses paid)
		Depreciation A/c      Dr			48633.48
		To Accumulated Depreciation A/c			48633.48
		(Being depreciation charged.)
2019		Repairs & Maintenance A/c      Dr			300
		To Cash A/c			300
		(Being annual R&M expense met)
		Depreciation A/c      Dr			48633.48
		To Accumulated Depreciation A/c			48633.48
		(Being depreciation charged.)
2020		Repairs & Maintenance A/c      Dr			4500
		To Cash A/c			4500
		(Being annual R&M expense paid)
		Depreciation A/c      Dr			24326.04
		To Accumulated Depreciation A/c			24326.04
		(being depreciation charged)
2021		Repairs & Maintenance A/c      Dr			7500
		To Cash A/c			7500
		(Being annual R&M expense paid)
2022		Repairs & Maintenance A/c      Dr			7500
		To Cash A/c			7500
		(Being annual R&M expense paid)
2023		Repairs & Maintenance A/c      Dr			7500
		To Cash A/c			7500
		(Being annual R&M expense paid)