Reference no: EM132483196

Point 1: On January 1, 2018, two companies, Apple Ltd. and Orange Inc., were incorporated. Each company operates a restaurant and had identical revenues during the year of $3 million but Apple bought its building for $1.7 million and the related land for $800,000. The company estimated that the building would have a useful life of 20 years with no residual value. Apple uses the straight-line method of depreciation. Because of the building purchase, Apple had an outstanding 4% bank loan during the year amounting on average to $2.8 million.

Point 2: Orange, however, did not buy a building. Instead it rented a building under a five-year operating lease starting on January 1, 2018, for $17,000 per month. Because of this, the company had to install leasehold improvements for $100,000, which were completed in the first few days of January. Because Orange did not have to buy a building, its outstanding 4% bank loan during 2018 averaged only $350,000.

Point 3: The income tax rate for both companies is 22%. Assume both companies had identical revenues and expenses except for the items noted above.

Instructions

Question (a) If Apple had net income of $175,000 for the year ended December 31, 2018, what net income did Orange have?

Question (b) If Apple had total assets of $3,025,000 as at December 31, 2018, and the only differences between the assets of Apple and Orange related to land, buildings, and leasehold improvements, the latter being depreciated over the term of the lease, what are the total assets for Orange at the end of 2018?

Question (c) Calculate the asset turnover ratio for both companies for 2018. (year-end asset balance rather than the average asset balance for the denominator.) why the ratios are different?

Question (d) Calculate the profit margin ratio for both companies for 2018. why they are different?