29 PGA - Horngren'S Financial And Managerial Accounting

Question

The income statement for California Communications follows. Assume California Communications signed a 3-month, 9%, \(3,000 note on June 1, 2018, and that this was the only note payable for the company.

 

California Communications
Income Statement
Year Ended July 31, 2018
Net Sales Revenue		\)         21,800
Cost of Goods Sold		14,000
Gross Profit		7,800
Operating Expenses:
Selling Expenses	\(        720
Administrative Expenses	1,650
Total Operating Expenses		2,370
Operating Income		5,430
Other Income and (Expenses):
Interest Expense	?
Total Other Income and (Expenses)		?
Net Income before Income Tax Expense		?
Income Tax Expense		1,080
Net Income		\)              ?

 

Requirements

1. Fill in the missing information for California’s year ended July 31, 2018, income statement. Round to the nearest dollar.

 

2. Compute the times-interest-earned ratio for the company. Round to two decimals.

Step-by-Step Solution

Answer

Net Income: $4,282

Times Interest Earned Ratio: 79.85 times

Completing Income Statement

$$\begin{gathered} Interest Expension = Notes Payable\times Rate\times \frac{No. of Months}{12} \\ = \$3000\times \frac{9}{100}\times \frac{3}{12} \\ = \$67.5 \end{gathered}$$

California Communications
Income Statement
Year Ended July 31, 2018
Net Sales Revenue		$      21,800
Cost of Goods Sold		14,000
Gross Profit		7,800
Operating Expenses:
Selling Expenses	$     720
Administrative Expenses	1,650
Total Operating Expenses		2,370
Operating Income		5,430
Other Income and (Expenses):
Interest Expense	68
Total Other Income and (Expenses)		68
Net Income before Income Tax Expense		5,362
Income Tax Expense		1,080
Net Income		$       4,282

Computation of ratio

$\begin{array}{c}Times Interest Earned Ratio=\frac{Operatig Income}{Interest Expense}\\ =\frac{\$5,430}{\$68}\\ =79.85 times\end{array}$