Chapter 13 Homework x RE) -). ezto.mheducation.com/hm.tpx elue 1.00 points E13-5

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Chapter 13 Homework x RE) -). ezto.mheducation.com/hm.tpx elue 1.00 points E13-5 Computing a Commonly Used Solvency Ratio [LO 13-4, 13-5] According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 8.1 percent betwoon 2012 and 2013. Lot's see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2013. 2013 2012 Sales Revenue Cost of Goods Sold Gross Profit Selling, General, and Adminlstrative Expenses Interest Expense income before Income Tax Expense Income Tax Expense Net Incorrie 104,000 $126,000 73,100 42,000 52,900 37,800 495 14,605 62,000 35,400 540 5,060 1,000 $4,060 9,205 Required: 1. Compute the times interest earned ratios for 2013 and 2012. (Round your answers to 1 decimal place.) Earned 2013 2. Does Computer Tycoon generate sufficient net income (before taxes and interest) to cover the cost of debt financing? Yes

Explanation / Answer

1.times interest ratio = (earnings before interest and tax) / interest expense

where,

earnings befor interest and tax = Gross profit - selling general and administrative expenses.

now,

times interest earned ratio for 2012 = ($52,900 - 37,800) / 495

=>30.5 times.

times interest earned ratio for 2013 = ($42,000 - 36,400) / 540

=>10.37 times.

2nd part

Yes.

Since times interest ratio is greater than 1, it can be said that tycoon generates sufficient net income to cover the cost of debt financing.

Times interest earned 2012 30.50 2013 10.37

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