Fundamental Accounting Principles
Fundamental Accounting Principles
23rd Edition
ISBN: 9781259536359
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
Question
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Chapter 11, Problem 5APSA
To determine

Times Interest earned: Times interest earned is calculated by dividing income before interest and income tax by interest expense. This ratio shows the ratio of income earned by a company to amount of interest expenses, whether the company is earning enough to pay off its interest expenses. Thus, higher the ratio more capable is the company to pay off its interest expense. Formula for the same is given below:

TimesInterestEarned=EarningsBeforeInterestAndTaxesInterestExpense

Requirement 1:

To determine:

Times interest earned ratio for miller Company using the formula as stated above.

Expert Solution
Check Mark

Explanation of Solution

Times interest earned for Miller Company.

TimesInterestEarned=EarningsBeforeInterestAndTaxesInterestExpense

TimesInterestEarned=20000060000TimesInterestEarned=3.33Times

To determine

Requirement 2:

To determine:

Times interest earned ratio for Weaver Company using the formula as stated above.

Expert Solution
Check Mark

Explanation of Solution

Times interest earned for Weaver Company

TimesInterestEarned=EarningsBeforeInterestAndTaxesInterestExpense

TimesInterestEarned=400000260000TimesInterestEarned=1.54Times

To determine

Requirement 3:

To determine:

Changes If sales Increase by 30%.

Expert Solution
Check Mark

Explanation of Solution

Miller Company   Weaver Company  
Sales 1000000 Sales 1000000
Add 30% 300000 Add 30% 300000
Total Sales 1300000 Total Sales 1300000
       
Sales 1300000 Sales 1300000
Variable Expense(80%) 1040000 Variable Expense(60%) 780000
Income Before Interest 260000 Income Before Interest 520000
Interest(Fixed Expense) 60000 Interest(Fixed Expense) 260000
Net Income 200000 Net Income 260000

If sales are increased by 30%, Net income of Miller increases to $200000 from $140000 and Net Income of Weaver increases from $140000 to $260000.

To determine

Requirement 4:

To determine:

Changes If Sales increase by 50%

Expert Solution
Check Mark

Explanation of Solution

Miller Company   Weaver Company  
Sales 1000000 Sales 1000000
Add 50% 500000 Add 50% 500000
Total Sales 1500000 Total Sales 1500000
       
Sales 1500000 Sales 1500000
Variable Expense(80%) 1200000 Variable Expense(60%) 900000
Income Before Interest 300000 Income Before Interest 600000
Interest(Fixed Expense) 60000 Interest(Fixed Expense) 260000
Net Income 240000 Net Income 340000

If sales are increased by 50% Net Income of Miller company increased to $240000 from $140000 and net income of Weaver increases to $340000 from $140000.

To determine

Requirement 5:

To determine:

Changes If Sales Increase by 80%

Expert Solution
Check Mark

Explanation of Solution

Miller Company   Weaver Company  
Sales 1000000 Sales 1000000
Add 80% 800000 Add 80% 800000
Total Sales 1800000 Total Sales 1800000
       
Sales 1800000 Sales 1800000
Variable Expense(80%) 1440000 Variable Expense(60%) 1080000
Income Before Interest 360000 Income Before Interest 720000
Interest(Fixed Expense) 60000 Interest(Fixed Expense) 260000
Net Income 300000 Net Income 460000

If sales increase to 80% net income of Miller Company increases to $300000 from $140000 and Weaver Company increases from $140000 to $460000.

To determine

Requirement 6:

To determine:

Changes If sales decrease by 10%

Expert Solution
Check Mark

Explanation of Solution

Miller Company   Weaver Company  
Sales 1000000 Sales 1000000
Less 10% 100000 Less 10% 100000
Total Sales 900000 Total Sales 900000
       
Sales 900000 Sales 900000
Variable Expense(80%) 720000 Variable Expense(60%) 540000
Income Before Interest 180000 Income Before Interest 360000
Interest(Fixed Expense) 60000 Interest(Fixed Expense) 260000
Net Income 120000 Net Income 100000

If Sales decrease by 10%, Net income of miller reduces to $120000 from $140000 and Weaver Company, reduces from $140000 to $100000.

To determine

Requirement 7:

To determine:

Changes If sales decrease by 20%

Expert Solution
Check Mark

Explanation of Solution

Miller Company   Weaver Company  
Sales 1000000 Sales 1000000
Less 20% 200000 Less 20% 200000
Total Sales 800000 Total Sales 800000
       
Sales 800000 Sales 800000
Variable Expense(80%) 640000 Variable Expense(60%) 480000
Income Before Interest 160000 Income Before Interest 320000
Interest(Fixed Expense) 60000 Interest(Fixed Expense) 260000
Net Income 100000 Net Income 60000

If sales decrease by 20%, Net income of Miller company reduces from $140000 to $100000 and Weaver Company reduces from $140000 to $60000

To determine

Requirement 8:

To determine:

Changes If sales decrease by 40%

Expert Solution
Check Mark

Explanation of Solution

Miller Company   Weaver Company  
Sales 1000000 Sales 1000000
Less 40% 400000 Less 40% 400000
Total Sales 600000 Total Sales 600000
       
Sales 600000 Sales 600000
Variable Expense(80%) 480000 Variable Expense(60%) 360000
Income Before Interest 120000 Income Before Interest 240000
Interest(Fixed Expense) 60000 Interest(Fixed Expense) 260000
Net Income 60000 Net Income -20000

If sales decrease by 40% net income of Miller Company reduces to $60000 from $140000 and Weaver Company suffers a loss of $20000 from profit of $140000.

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Fundamental Accounting Principles

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