Question

The following information is computed from Katy Inc.'s annual report for 2018.

	2018	2017
Current assets	$ 2,731,020	$ 2,364,916
Property and equipment, net	10,960,286	8,516,833
Intangible assets, at cost less applicable
amortization	294,775	255,919
	$13,986,081	$11,137,668
Current liabilities	$ 3,168,123	$ 2,210,735
Deferred federal income taxes	160,000	26,000
Mortgage note payable	456,000	-
Stockholders' equity	10,201,958	8,900,933
	$13,986,081	$11,137,668
Net sales	$33,410,599	$25,804,285
Cost of goods sold	(30,168,715)	(23,159,745)
Selling and administrative expense	(2,000,000)	(1,500,000)
Interest expense	(216,936)	(39,456)
Income tax expense	(400,000 )	(300,000 )
Net income	$   624,948	$   805,084

Note: One-third of the operating lease rental charge was $100,000 in 2018 and $50,000 in 2017. Capitalized interest totaled $30,000 in 2018 and $20,000 in 2017.

Required:

a.	Based on the above data for both years, compute:
	1.	times interest earned
	2.	debt ratio
	3.	debt/equity ratio
b.	Comment on the firm's long-term borrowing ability based on the analysis.

Answer 1

		2018	2017
1	Net sales	$                   33,410,599	$                    25,804,285
	Cost of goods sold	$                 (30,168,715)	$                  (23,159,745)
	Selling and administrative expense	$                   (2,000,000)	$                    (1,500,000)
	(A)	$                     1,241,884	$                      1,144,540
	Interest expense	$                        216,936	$                           39,456
	Capitalized interest	$                          30,000	$                           20,000
	Total Imterest                        (B)	$                        246,936	$                           59,456
	A/B	5.03 times	19.25 times
2	Debt Ratio =	Total Liabilities / Total Assets
		2018	2017
	Debt Ratio =	27%	20%
		(3748123/13968081)	(2236735/11137668)
3	Debt Equity Ratio =	Total Liabilities / Shareholders Equity
		37%	25%
		(3748123/10201958)	(2236735/8900933)
	In 2018, there was a rise in debt in Katy Inc. This included current liabilities, deferred taxes, and a new mortgage note payable.Hence there was a rise in the debt, debt/equity ratio.