Question

Jennifer decides that she will go into the tourist industry on Lake Geneva, and buy a...

Jennifer decides that she will go into the tourist industry on Lake Geneva, and buy a concession to hire out canoes on the lake. She borrows CHF40,000 (CHF is swiss currency) from her parents and puts CHF20,000 in herself. The arrangment with the Canton is that she pays CHF50,000 at the start for the concession, which runs five years, but must also pay an annual rental of CHF10,000 at the end of the season in october. She negotiates a deal with a canoe supplier who sells her 20 canoes for CHF 30,000 but agrees that she should pay CHF10,000 on delivery and the rest a year later. During the season she receives CHF 90,000 (cash) in canoe rentals.

Task: Making and specifying whatever assumptions you wish, you are asked to draw up a simple statement of profit or loss for the first year and statement of finacial postiton at the end of the year.

Homework Answers

Answer #1

Answer:

Let us assume Jennifer pays interest rate of 5% on her borrowing from Parents. Annual interest on borrowings = CHF40,000* 5% = CHF 2,000

Let us assume useful of life of canoe =10 years.

Assuming SLM depreciation per year of 20 canoes = CHF 30,000 /10 =CHF 3,000

Amortization of Concession per year = 50,000 /5 =CHF 10,000

Let us assume other operating expenses = CHF 5,000

Cash balance at the end of year 1 = Equity + Borrowing from parents + Rental Income - (Payment for concession + Rental payment + Payment for canoe + Interest payments + Other operating expense - Tax expense)

= 20,000 + 40,000 +90,000 - (50,000 + 10,000 + 10,000 + 2,000 + 5,000 + 18,000) = CHF 55,000

Statement of profit or loss for the first year and Statement of financial position at the end of the year 1 are prepared as below:

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