Question

Juice Jets A few years ago, JJI invested in an initiative called Juice Jets. JJI purchased 10 used vans and outfitted them for juice making, so that mobile juice bars could attend community events, concerts, and parks during the warm weather months. As at December, 31, 2019, the vans have a total net book value of $400,000 and a remaining useful life of five years. JJI had expected the Juice Jets, which were piloted in Charlottetown and St John's, to contribute positively to net income. However, this has not been the case. The 10 Juice ets together barely sell enough juice to cover operating cnote (which include fruit and vegetables, fuel costs and other vehicle expenses, mendontees to attend events, and employee wages). Tim is disappointed that the Juice ot doing well, especially because capital costs to start up the project were signiperating cash flows for each of the next five years are estimated to be $85.00, he appropriate discount rate for determining the value of the vans is 10%. The vans could be sold immediately for $250,000 or at the end of five years for $90,000.

What is accounting issue?

Answer 1

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The major accounting issues in the above case can be with the estimation of operating cash flows or the discount rate. Explanation: Operating cash flow each for 5 years = $85,000. After 5 years, selling price = $90,000. Discount rate = 10%. 1.1 Net present value can be computed as: Period Discount rate Cash flows Net present value 1 85000 77272.72727 2 1.1 85000 70247.93388 3 1.1 85000 63861.75808 4 1.1 85000 58056.14371 5 1.1 85000 52778.31246 5 1.1 90000 55882.91908 NPV amount 378099.7945 While, the purchasing price is $400,000, which is more than the net present value if vans are sold at the end of 5 years. Loss incurred $21,900.21.

Depreciation per year on van = ($400,000 - $90,000) / 5 = $310,000/ 5 = $62,000. Profit that can possibly be occur = $85,000 - $62,000 - $23,000. The management cannot make changes in net book value of asset or in the selling price, but, the major accounting issues in the above case can be with the estimation of operating cash flows or with the discount rate (related to risks).