Question

Part one:

A) Barton Chocolates used a promissory note to borrow $1,050,000 on July 1, 2018, at an annual interest rate of 5 percent. The note is to be repaid in yearly installments of $210,000, plus accrued interest, on June 30 of every year until the note is paid in full (on June 30, 2023). Show how the results of this transaction would be reported in a classified balance sheet prepared as of December 31, 2018. (Do not round intermediate calculations.)

B) The balance sheet for Shaver Corporation reported the following: cash, $13,500; short-term investments, $18,500; net accounts receivable, $52,000; inventories, $57,000; prepaids, $18,500; equipment, $111,000; current liabilities, $57,000; notes payable (long-term), $87,000; total stockholders’ equity, $126,500; net income, $5,020; interest expense, $7,800; income before income taxes, $10,380.

1) Compute Shaver’s debt-to-assets ratio and times interest earned ratio. (Round your answers to 2 decimal places.)

Answer 1

1) $26,250 BARTON CHOCOLATES Balance Sheet (partial) As of December 31, 2018 Current Liabilities Interest Payable ($1.050.000 * 5% * 6/12) Current Portion of Note Payable Total current liabilities Long-term liabilities Notes Payable (final payment due 2023) Total liabilities $210.000 $236.250 $840,000 $1,076,250 Debt to Asset Ratio = (Short-term debt + Long-term debt) / Total assets = ($57,000+ $87,000)/($13,500+ $18,500 + $52,000+ $57,000+ $18,500 + $111.000) = $144.000 / $270.500 0.53 Times Interest Earned Ratio = (Net Income + Interest Expense + Income Tax Expense) / Interest Expense = ($5,020 + $7,800 + $5,360) / $7,800 = $18.180 / $7.800 2.33 Workings: Income Tax Expense = Income before income taxes - Net Income = $10,380 - $5,020 $5,360