Question

According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 8.1 percent between 2012 and 2013. Let’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 $ 118,000 $ 147,000 Cost of Goods Sold 69,000 78,700 Gross Profit 49,000 $ 68,300 Selling, General, and Administrative Expenses 37,800 40,600 Interest Expense 680 565 Income before Income Tax Expense 10,520 27,135 Income Tax Expense 2,500 6,800 Net Income $ 8,020 $ 20,335 1. Compute the times interest earned ratios for 2013 and 2012. (Round your answers to 1 decimal place.)Times Interest Earned2012 2013 2. Does Computer Tycoon generate sufficient net income (before taxes and interest) to cover the cost of debt financing?YesNo

Answer 1

Answer:

Times Interest earned:

2013 16.47

2012 49.02

2.- Yes it is suffficient as it is earnings above 10 times their interest

Explanation:

December 31, 2013.2013 2012 Sales Revenue $ 118,000 $ 147,000 Cost of Goods Sold 69,000 78,700 Gross Profit 49,000 $ 68,300 Selling, General, and Administrative Expenses 37,800 40,600 Interest Expense 680 565 Income before Income Tax Expense 10,520 27,135 Income Tax Expense 2,500 6,800 Net Income $ 8,020 $ 20,335

year 2013

Income before taxes: 10,520 + interest expense 680 =

interest before interest and taxes = 11,200

times interest earnings:

11,200/680 = 16.47

year 2012

Income before taxes: 27,135 + interest expense 565 =

interest before interest and taxes = 27,700

times interest earnings:

27,700/565 = 49.02