Answer: See explanation
Explanation:
A. Current assets = permanent current assets + temporary current assets
Temporary current assets:
= $940,000 - $420,000
= $520,000
Short-term interest expense:
= 5% × [$520,000 + ½ ($420,000)]
= 5% ($520,000 + $210,000)
= 5% × ($730,000)
= 0.05 × $730,000
= $36,500
Long-term interest:
= 9% × [$740,000 + ½ ($420,000)]
= 9% × ($740,000 + $210,000)
= 9% × $950,000
= 0.09 × $950,000
= $85,500
Total interest expense:
= $36,500 + $85,500
= $122,000
Earnings before interest and taxes $340,000
Less: Interest expense = $122,000
Earnings before taxes = $218,000
Less: Taxes (30%) = $65,400
Earnings after taxes = $152,600
B. Short term interest expense:
= $260,000 × 5%
= $260,000 × 0.05
= $13,000
Long term interest expense:
= ($740,000 + $420,000 + $260,000) × 9%
= $1,420,000 × 0.09
= $127,800
Total interest expense:
= $13000 + $127800
= $140,800
Earnings before interest and taxes $340,000
Less: Interest expense = $140,800
Earnings before taxes = $199,200
Less: Taxes (30%) = $59760
Earnings after taxes = $139440