Question

According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Let's see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2016. Sales Revenue Cost of Goods Sold Gross Profit Selling, General, and Administrative Expenses Interest Expense Income before Income Tax Expense Income Tax Expense Net Income 2016 $ 109,000 64,500 44,500 36,900 590 7,010 1,500 $ 5,510 2015 $133,500 75,100 58,400 38,800 520 19,080 5,900 13,180 Required: 1. Compute the times interest earned ratios for 2016 and 2015. (Round your answers to 1 decimal place.) Times Interest Earned 2015 2016 2. Does Computer Tycoon generate sufficient net income in both years before taxes and interest) to cover the cost of debt financing? Yes No

Answer 1

Ans:

Time interest earned = EBIT / Interest expense

EBIT:	2016 $	2015 $
Gross profit	44,500	58,400
Selling, General and Administrative expenses	36,900	38,800
EBIT	7,600	19,600

1. Time interest earned = EBIT / Interest expense

Time interest earned	2016	2015
EBIT	$7,600	$19,600
Interest expense	$590	$520
EBIT/Interest expense	12.9	37.7

	Time interest earned
2015	37.7
2016	12.9

2. Yes

Company tycoon generate sufficient net income in both years to cover the cost of debt financing.

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