Question

c. What is the impact of incl income be excluded from the times interest earned coverage? P 7-9 Allen Company and Barker Company are competitors in the same industry. Selected financial data from their 2011 statements follow. Balance Sheet December 31, 2011 Barker Company Allen Company $ 35,000 120,000 190,000 100,000 20,000 520,000 $985,000 10,000 45,000 70,000 40,000 11,000 180,000 $356,000 Cash Accounts receivable Inventory Investments Intangibles Property, plant, and equipment Total assets (continued)

Answer 1

Answer-a.1- Times Interest Earned Ratio:-

Allen Company:

Times Interest Earned Ratio=Recurring Earnings, Excluding Interest Expense/ Interest Expenses

=$95,000 ($1,050,000-$725,000-$230,000)/ $10,000

=9.5 times per year

Barker Company:

Times Interest Earned Ratio= Recurring Earnings,Excluding Interest Expenses/ Interest Expenses

=$170,000 ($2,800,000-$2,050,000-$580,000)/ $32,000

=5.3 times per year

2-Debt Ratio:-

Allen Company:-

Debt Ratio= Total Liabilities / Total Assets

=$160,000 ($60,000+$100,000)/ $356,000*100

=44.9%

Barker Company:-

Debt Ratio= Total Liabilities/ Total Assets

=$575,000 ($165,000+$410,000) / $985,000*100

=58.4%

3-Debt/ Equity Ratio:

Allen Company:

Debt/ Equity Ratio= Total Liabilities/ Stockholders' Equity

=$160,000 ($60,000+$100,000)/ $50,000+$100,000+$46,000

=$160,000/ $196,000*100

=81.6%

Barker Company:-

Debt/Equity Ratio= Total Liabilities/ Stockholders' Equity

=$575,000 ($165,000+$410,000)/ $30,000+$280,000+$100,000

=$575,000/ $410,000*100

=140.2%

4-Debt to tangible net worth ratio:

Allen Company:-

Debt to tangible net worth= Total Liabilities/ Stockholders' Equity-Intangible assets

=$160,000/ $196,000-$11,000*100

=86.5%

Barker Company:-

Debt to tangible net worth= Total Liabilities/ Stockholders' Equity- Intangible assets

=$575,000/ $410,000-$20,000*100

=147.4%

b-Barker Company's position to take on additional long-term debt:-

Ratios	Industry Average	Barker Company
Times Interest Earned	7.2 times	5.3 times
Debt Ratio	40.3%	58.4%
Debt/ Equity Ratio	66.6%	140.2%
Debt to tangible net worth Ratio	72.7%	147.4%

Barker Company has less than average coverage of its interest. Barker Company's Times Interest Earned Ratio is 5.3 times while the industry average is 7.2 times.

Barker Company has higher than average in next all three ratios.

Therefore, Barker Company is not in a position to take on additional long-term debt.

c-Better long-term debt position:-

Ratio	Industry Average	Allen Company	Barker Company
Times Interest Earned	7.2 times	9.5 times	5.3 times
Debt Ratio	40.3%	44.9%	58.4%
Debt/Equity Ratio	66.6%	81.6%	140.2%
Debt to tangible net worth Ratio	72.7%	86.5%	147.4%

Explanation:-

Allen Company has better Times Interest Earned Ratio, Debt Ratio, Debt/ Equity Ratio and Debt to Tangible Net Worth Ratio than Barker Company.So, Allen Company is in a better position to take on additional long-term debt.

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