Question

Comparative financial statements for Heritage Antiquing Services for the fiscal year ending December 31 appear on the following page. The company did not issue any new common or preferred stock during the year. A total of 600 thousand shares of common stock were outstanding. The interest rate on the bond payable was 10%, the income tax rate was 40%, and the dividend per share of common stock was $0.75. The market value of the company’s common stock at the end of the year was $26. All of the company’s sales are on account.
Heritage Antiquing Services
Comparative Balance Sheet
(dollars in thousands)
This Year Last Year
Assets
Current assets:
Cash $ 1,190 $ 1,380
Accounts receivable, net 9,500 7,400
Inventory 13,700 11,900
Prepaid expenses 730 520
Total current assets 25,120 21,200
Property and equipment:
Land 9,700 9,700
Buildings and equipment, net 51,232 43,446
Total property and equipment 60,932 53,146
Total assets $86,052 $74,346
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $19,700 $18,600
Accrued payables 1,080 750
Notes payable, short term 0 170
Total current liabilities 20,780 19,520
Long-term liabilities:
Bonds payable 9,400 9,400
Total liabilities 30,180 28,920
Stockholders' equity:
Preferred stock 1,000 1,000
Common stock 2,000 2,000
Additional paid-in capital 4,000 4,000
Total paid-in capital 7,000 7,000
Retained earnings 48,872 38,426
Total stockholders' equity 55,872 45,426
Total liabilities and stockholders' equity $86,052 $74,346
Heritage Antiquing Services
Comparative Income Statement and Reconciliation
(dollars in thousands)
This Year Last Year
Sales $72,000 $65,000
Cost of goods sold 35,000 33,000
Gross margin 37,000 32,000
Selling and administrative expenses:
Selling expenses 10,900 10,600
Administrative expenses 6,900 6,800
Total selling and administrative expenses 17,800 17,400
Net operating income 19,200 14,600
Interest expense 940 940
Net income before taxes 18,260 13,660
Income taxes 7,304 5,464
Net income 10,956 8,196
Dividends to preferred stockholders 60 360
Net income remaining for common
stockholders 10,896 7,836
Dividends to common stockholders 450 450
Net income added to retained earnings 10,446 7,386
Retained earnings, beginning of year 38,426 31,040
Retained earnings, end of year $48,872 $38,426
Required:
Compute the following financial ratios for long-term creditors for this year:
1. Times interest earned ratio. (Round your answer to 1 decimal place. )
Times interest earned ratio
2. Debt-to-equity ratio. (Round your answer to 2 decimal places.)
Debt-to-equity ratio

Answer 1

Answer and Explanation:

The computation is shown below:

1. Times interest earned ratio is

= Earning before interest and taxes ÷ Interest expense

= $19,200 ÷ $940

= 20.4

2. And, the Debt to equity ratio is

= Total Liability ÷ Total stockholder's equity  

= $30,180 ÷ $55,872  

= 0.54

We simply applied the above formulas so that the  financial ratios for long-term creditors could come