Reference no: EM132976974
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, 20X2, 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 Jets together barely sell enough juice to cover operating costs (which include fruit and vegetables, fuel costs and other vehicle expenses, vendor fees to attend events, and employee wages). Tim is disappointed that Juice Jets is not doing well, especially because capital costs to start up the project were significant. Operating cash flows for each of the next five years are estimated to be $85,000. The appropriate discount rate for the risk of the vans is 10%. The vans could be sold immediately for $250,000 or at the end of five years for $90,000.
Lease of refrigerators
JJI entered into a contract with Carlin's Inc. for the use of heavy-duty refrigerators. The refrigerators will be used by JJI in its juice bars to store the fresh ingredients used for its juices. Once JJI has received the refrigerators, JJI will then set them up for its purposes and put them into use in the business. The refrigerators are used solely by JJI for its operations. The term is for six years and the estimated useful life of the refrigerators is nine years. Annual lease payments of $22,000 are to be made at the beginning of each year and are expensed by JJI. The interest rate implicit in the contract is 10%.
At the end of the lease, JJI has the option of purchasing the refrigerators for fair market value. Although not written in the lease, JJI has indicated to Carlin's Inc. that it does plan to purchase the refrigerators. As per the lease agreement, a $20,000 penalty is payable to Carlin's Inc. if the purchase option is not exercised.
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