Chapter 11, Problem 5BTN

Review the chapter’s opening feature about Tim Westergren and the business he founded, Pandora. Assume that he is considering expanding the business to Europe and that the current abbreviated income statement appears as follows.

Assume also that the company currently has no interest-bearing debt. If it expands to Europe, it will require a $300,000 loan. The company has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales in Europe will equal $250,000 and that all expenses at both locations will continue to equal 55% of sales.

Required

1. 1. Prepare an income statement (showing three separate columns for current operations, European, and total) for the company assuming that it borrows the funds and expands to Europe. Annual revenues for current operations are expected to remain at $1,000,000.
2. 2. Compute the company’s times interest earned under the expansion assumptions in part 1.
3. 3. Assume sales in Europe are $400,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
4. 4. Assume sales in Europe are $100,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
5. 5. Comment on your results from parts 1 through 4.