Question

The following information is taken from the 2017 annual report of Metlock, Inc. Metlock's fiscal year ends December 31 of each year, Metlock's December 31, 2017, balance sheet is as follows 3490 Metlock Inc Balance sheet December 31, 2017 Assets Cash Inventory Total current assets Plant and equipment Accumulated depreciation Total assets Liabilities Bonds payable (net of discount) Stockholders' equity Common stock Retained earnings Total liabilities and stockholders' equity 1.700 2.190 2.000 (1601 4,030 $1.426, $4.030 Note X: Long Term Debt: On January 1, 2016. Metlock issued bonds with face value of $1.500 and a coupon rate equal to 10. The bonds were issued to yield 12% and mature on January 1, 2021 Additional information concerning 2018 is as follows: 1. Sales were $3.200, all for cash. 2. Purchases were $1,900,all paid in cash 3. Salaries were $660, all paid in cash 4. Property, plant, and equipment was originally purchased for $2.000 and is deprecated straight-line over a 25-year life with no salvage value 5. Ending inventory was $2.100. 6. Cash dividends of $110 were declared and paid by Metlock. 8. The market rate of interest on bonds of similar risk was 12 during all of 2018 9. Interest on the bonds is paid semiannually each June 30 and December 31

Answer 1

Income Statement for the year ended Dec 31, 2018:
	Amount $
Sales	3200
Less: COGS:
Op. Inv.	1700
Add:Purchases	1900
Total available	3600
Less:Cl. Inv.	2100
COGS	1500
Gross Profit	1700
Less:Expenses:
Salaries	660
Depreciation	80	(2000/25)
Interest	172	Note 1&2
Total expenses	912
Net Income	788
Add:Ret Earn Op. Bal.	1104
Less:Dividend paid	-110
Cl. Ret. Earnings	1782
Balance Sheet as on Dec 31, 2018:
Assets:	Amount $
Cash	870	(490+3200-1900-660-110-150)
Inventory	2100
Current Assets	2970
Plant and equipment	2000
Acc. Depreciation	-240	(160+80)
Total Assets	4730
Liabilities & ST Eq.:	Amount $
Bonds payable (net of discount)	1448	(1426+22)
Stockholders' equity:
Common Stock	1500
Retained earnings	1782
Total Liabilities & ST Eq.:	4730
Ratios:	Formula	2017	2018
Debt assets ratio	TD / TA	1426/4030 = 0.35	1448/4730= 0.31
Times interest earned ratio	EBIT/Int. exp.	(490+169)/169=3.9 times	(788+172)/172= 5.58 times
Note: 1)The bond discount has been amortised on Effective interest method.
2) Interest expense = 150 + (1426*6% - 75) + ((1426+10.56)*6% - 75)=
150 + 11 + 11 = 172