Gen Combo Ll Financial Accounting Fundamentals; Connect Access Card
Gen Combo Ll Financial Accounting Fundamentals; Connect Access Card
7th Edition
ISBN: 9781260581256
Author: John Wild
Publisher: McGraw-Hill Education
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Chapter 9, Problem 5PSB
To determine

Times interest earned:

Times interest earned measures whether the company is in position to pay its debt obligations or not. It is also known as Interest Coverage Ratio.

1.

To compute: Times interest earned of E company.

Expert Solution
Check Mark

Explanation of Solution

Given,

For E company

Income before interest is $120,000.

Interest expense is $90,000.

Times interest earned

Formula to calculate times interest earned,

  Timesinterestearned=IncomebeforeinterestandtaxInterestexpense

Substitute $120,000 for income before interest and tax and $90,000 for interest expense.

  Timesinterestearned=$120,000$90,000=1.33Times

Thus, times interest earned of E company is 1.33 times.

2.

To determine

To compute: Times interest earned of S company.

2.

Expert Solution
Check Mark

Explanation of Solution

Given,

For S company

Income before interest is $60,000.

Interest expense is $30,000.

Times interest earned

Formula to calculate times interest earned,

  Timesinterestearned=IncomebeforeinterestandtaxInterestexpense

Substitute $60,000 for income before interest and tax and $30,000 for interest expense.

  Timesinterestearned=$60,000$30,000=2Times

Thus, times interest earned of S company is 2 times.

3.

To determine

To compute: Net income if sales increase by 10%.

3.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 10%.

    ParticularsE Company ($)(given)E Company ($)(10% increased sales)S Company ($)(given)S Company ($)(10% increased sales)
    Sales240,000264,000240,000264,000
    Variable expenses120,000132,000180,000198,000
    Income before interest120,000132,00060,00066,000
    Interest expense90,00090,00030,00030,000
    Net Income30,00042,00030,00036,000
    Increase in net income40%20%

Table (1)

Working note:

Formula to calculate percentage increase in net income is,

  Percentageincreaseinnetincome=IncreaseinnetIncomePriornetincome

For Company E

  Percentageincreaseinnetincome=$12,000$30,000=40%

For Company S

  Percentageincreaseinnetincome=$6,000$30,000=20%

Thus, net income of company E gets increased by 40% and company S by 20%.

4.

To determine

To compute: Net income if sales increase by 40%.

4.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 40%.

    ParticularsE Company ($)(given)E Company ($)(40% increased sales)S Company ($)(given)S Company ($)(40% increased sales)
    Sales240,000336,000240,000336,000
    Variable expenses120,000168,000180,000252,000
    Income before interest120,000168,00060,00084,000
    Interest expense90,00090,00030,00030,000
    Net Income30,00078,00030,00054,000
    Increase in net income160%80%

Table (1)

Working Note:

Formula to calculate percentage increase in net income is,

  Percentageincreaseinnetincome=IncreaseinnetIncomePriornetincome

For Company E

  Percentageincreaseinnetincome=$48,000$30,000=160%

For Company S

  Percentageincreaseinnetincome=$24,000$30,000=80%

Thus, net income of company E gets increased by 160% and company S by 80%.

5.

To determine

To compute: Net income if sales increase by 90%.

5.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 90%.

    ParticularsE Company ($)(given)E Company ($)(90% increased sales)S Company ($)(given)S Company ($)(90% increased sales)
    Sales240,000456,000240,000456,000
    Variable expenses120,000228,000180,000342,000
    Income before interest120,000228,00060,000114,000
    Interest expense90,00090,00030,00030,000
    Net Income30,000138,00030,00084,000
    Increase in net income360%180%

Table (1)

Working note:

Formula to calculate percentage increase in net income is,

  Percentageincreaseinnetincome=IncreaseinnetIncomePriornetincome

For Company E

  Percentageincreaseinnetincome=$108,000$30,000=360%

For Company S

  Percentageincreaseinnetincome=$54,000$30,000=180%

Thus, net income of company E gets increased by 360% and company S by 180%.

6.

To determine

To compute: Net income if sales decrease by 20%.

6.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 20%.

    ParticularsM Company ($)(given)M Company ($)(20% decreased sales)S Company ($)(given)W Company ($)(20% decreased sales)
    Sales240,000192,000240,000192,000
    Variable expenses120,00096,000180,000144,000
    Income before interest120,00096,00060,00048,000
    Interest expense90,00090,00030,00030,000
    Net Income30,0006,00030,00018,000
    Increase in net income-80%-40%

Table (1)

Working note:

Formula to calculate percentage increase in net income is,

  Percentagedecreaseinnetincome=IncreaseinnetIncomePriornetincome

For Company E

  Percentagedecreaseinnetincome=$24,000$30,000=80%

For Company S

  Percentagedecreaseinnetincome=$12,000$30,000=40%

Thus, Net Income of company E gets decreased 80% and company S by 40%.

7.

To determine

To compute: Net income if sales decrease by 50%.

7.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 50%.

    ParticularsE Company ($)(given)E Company ($)(50% decreased sales)S Company ($)(given)S Company ($)(50% decreased sales)
    Sales240,000120,000240,000120,000
    Variable expenses120,00060,000180,00090,000
    Income before interest120,00060,00060,00030,000
    Interest expense90,00090,00030,00030,000
    Net Income30,000(30,000)30,0000
    Increase in net income-200%-100%

Table (1)

Working Note:

Formula to calculate percentage increase in net income is,

  Percentagedecreaseinnetincome=IncreaseinnetIncomePriornetincome

For Company E

  Percentagedecreaseinnetincome=$60,000$30,000=200%

For Company S

  Percentagedecreaseinnetincome=$30,000$30,000=100%

Thus, Net Income of company E gets decreased 200% and company S by 100%.

8.

To determine

To compute: Net income if sales decrease by 80%.

8.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 80%.

    ParticularsE Company ($)(given)E Company ($)(80% decreased sales)S Company ($)(given)S Company ($)(80% decreased sales)
    Sales240,00048,000240,00048,000
    Variable expenses120,00024,000180,00036,000
    Income before interest120,00024,00060,00012,000
    Interest expense90,00090,00030,00030,000
    Net Income30,000(66,000)30,000(18,000)
    Increase in net income-320%-160%

Table (1)

Working note:

Formula to calculate percentage increase in net income is,

  Percentagedecreaseinnetincome=IncreaseinnetIncomePriornetincome

For Company E

  Percentagedecreaseinnetincome=$96,000$30,000=320%

For Company S

  Percentagedecreaseinnetincome=$48,000$30,000=160%

Thus, Net Income of company E gets decreased 320% and company S by 160%.

9.

To determine

Relation to fixed cost strategies of the two companies

9.

Expert Solution
Check Mark

Explanation of Solution

Relation to fixed cost strategies of the two companies

  • Here in this case fixed cost refers to interest expenses.
  • Interest expenses in company E are $ 90,000 and in company S are $30,000. Interest expenses are higher in company E than in company S
  • Due to higher interest expenses, change in net income gets more effected due to change in sales.
  • Higher fixed cost is inversely related to times interest earned method.
  • So if sales get increased, E company enjoys higher percent increase in income in comparison to company S
  • If sales get decreased, S company experiences smaller percent change in net income in comparison to company E.

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Chapter 9 Solutions

Gen Combo Ll Financial Accounting Fundamentals; Connect Access Card

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