Question

Exercise 9-14 Computing and interpreting times interest earned LO A1 Use the following information from separate companies a through f: Net Income (Loss) Interest Expense Income Taxes a. $ 163,000 $ 55,420 $ 40,750 b. 157,600 36,248 56,736 c. 166,100 8,305 79,728 d. 138,550 33,252 58,191 e. 105,950 22,250 40,261 f. (45,640 ) 97,213 0 Compute times interest earned.

  
Which company indicates the strongest ability to pay interest expense as it comes due?

• Company a

• Company b

• Company c

• Company d

• Company e

• Company f.   

Listed below are a few transactions and events of Maxum Company.

1. Employees earn vacation pay at a rate of one day per month. During December, 33 employees qualify for one vacation day each. Their average daily wage is $300 per employee.
2. During December, Maxum Company sold 4,400 units of a product that carries a 60-day warranty. December sales for this product total $138,000. The company expects 6% of the units to need warranty repairs, and it estimates the average repair cost per unit will be $10.

Prepare any necessary adjusting entries at December 31, 2017, for Maxum Company’s year-end financial statements for each of the above separate transactions and events.

Answer 1

Solution:
We will have to First find Times Interest earned to find out companies ability
to pay its Debt ,Company which has highest times interest will be selected:
Times Interest Earned = EBIT/Interest Expense
EBIT = Net income + Interest Expense + Income Taxes
Calculation of Times Interest Earned:
Company a)
EBIT = Net income + Interest Expense + Income Taxes
$163,000+$55,420+$40,750
$259,170
Times Interest Earned = EBIT/Interest Expense
$259170/$55420
4.676470588
Company a) times interest earned = 4.68
Company b)
EBIT = Net income + Interest Expense + Income Taxes
$157,600+$36,248+$56,736
$250,584
Times Interest Earned = EBIT/Interest Expense
$250,584/$36,248
6.913043478
Company b) times interest earned = 6.91
Company c)
EBIT = Net income + Interest Expense + Income Taxes
$166,100+$8,305+$79,728
$254133
Times Interest Earned = EBIT/Interest Expense
$254,133/$8,305
30.6
Company c) times interest earned = 30.6
Company d)
EBIT = Net income + Interest Expense + Income Taxes
$138,550+$33,252+$58,191
$229993
Times Interest Earned = EBIT/Interest Expense
$229,993/$33,252
6.916666667
Company d) times interest earned = 6.92
Company e)
EBIT = Net income + Interest Expense + Income Taxes
$105,950+$22,250+$40,261
$168461
Times Interest Earned = EBIT/Interest Expense
$168,461/$22,250
7.571280899
Company e) times interest earned = 7.57
Company f)
EBIT = Net income + Interest Expense + Income Taxes
$-45,640+$97,213+$0
$51573
Times Interest Earned = EBIT/Interest Expense
$51,573/$97,213
0.530515466
Company f) times interest earned = 0.53
Company c should be selected as it has the strongest ability to pay its Debts,
as it has the highest Times Interest Paid