Q29PGA - 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.

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

Step1: Completing Income Statement

$$\begin{gathered} \mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{ }\mathit{E}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\mathit{s}\mathbf{ }\mathbf{=}\mathit{N}\mathit{o}\mathit{t}\mathit{e}\mathit{s}\mathbf{ }\mathit{p}\mathit{a}\mathit{y}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathbf{\times }\mathit{R}\mathit{a}\mathit{t}\mathit{e}\mathbf{\times }\frac{\mathbf{N}\mathbf{o}\mathbf{.}\mathbf{o}\mathbf{f}\mathbf{ }\mathbf{M}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{h}\mathbf{s}\mathbf{ }}{\mathbf{12}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{ }\mathbf{000}\mathbf{\times }\frac{\mathbf{9}}{\mathbf{100}}\mathbf{\times }\frac{\mathbf{3}}{\mathbf{12}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{67}\mathbf{.}\mathbf{5} \end{gathered}$$

Step 2: Computation of ratio

$$\begin{gathered} \mathbf{Times}\mathbf{ }\mathbf{Interest}\mathbf{ }\mathbf{Earned}\mathbf{ }\mathbf{Ratio}\mathbf{ }\mathbf{=}\frac{\mathbf{operatig}\mathbf{ }\mathbf{Income}\mathbf{ }}{\mathbf{Interest}\mathbf{ }\mathbf{Expense}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{430}}{\mathbf{\$}\mathbf{68}} \\ \mathbf{=}\mathbf{79}\mathbf{.}\mathbf{85}\mathbf{ }\mathbf{times}\mathbf{ } \end{gathered}$$