Fundamental Accounting Principles
Fundamental Accounting Principles
24th Edition
ISBN: 9781259916960
Author: Wild, John J., Shaw, Ken W.
Publisher: Mcgraw-hill Education,
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Chapter 11, Problem 5BPSB
To determine

Concept Introduction:

Times Interest earned:

Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.

  Times interest earned=Earnings before Interest and TaxInterest expenses

Requirement 1:

To Compute:

The times interest earned for the given companies

Expert Solution
Check Mark

Answer to Problem 5BPSB

The times interest earned for Ellis Company is 1.33 and the times interest earned for Seidel Company is 2

Explanation of Solution

    Ellis CompanySeidel Company
    Income before Interest120,00060,000
    Interest Expenses90,00030,000
    Times Interest Earned

      120,00090,000=1.33

      60,00030,000=2

Thus, the times interest earned have been calculated for two companies.

To determine

Concept Introduction:

Times Interest earned:

Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.

  Times interest earned=Earnings before Interest and TaxInterest expenses

Requirement 2:

The impact of sales increase by 10% on each company's net income

Expert Solution
Check Mark

Answer to Problem 5BPSB

When sales increase by 10%, the Net Income of Ellis Company becomes $ 42,000 from $30,000 resulting in 40% increase over previous profits. For Seidel Company the profit increases from $ 30,000 to $36,000 resulting in 20% increase over last profits.

Explanation of Solution

    Ellis CompanySeidel Company
    PresentIncreased sales by 10%Increase /(Decrease ) in %agePresentIncreased sales by 10%Increase /(Decrease ) in %age
    Sales240,000264,00010%240,000264,00010%
    Variable Expenses 120,000132,00010%180,000198,00010%
    Income before Interest120,000132,00010%60,00066,00010%
    Interest Expense (fixed)90,00090,0000%30,00030,0000%
    Net Income30,00042,00040%30,00036,00020%

Thus, the impact of sales increase has been calculated.

To determine

Concept Introduction:

Times Interest earned:

Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.

  Times interest earned=Earnings before Interest and TaxInterest expenses .

Requirement 3:

The impact of sales increase by 40% on each company's net income

Expert Solution
Check Mark

Answer to Problem 5BPSB

When sales increase by 40%, the Net Income of Ellis Company becomes $ 78,000 from $30,000 resulting in 160% increase over previous profits. For Seidel Company the profit increases from $ 30,000 to $54,000 resulting in 80% increase over last profits.

Explanation of Solution

    Ellis CompanySeidel Company
    PresentIncreased sales by 40%Increase /(Decrease ) in %agePresentIncreased sales by 40%Increase /(Decrease ) in %age
    Sales240,000336,00040%240,000336,00040%
    Variable Expenses 120,000168,00040%180,000252,00040%
    Income before Interest120,000168,00040%60,00084,00040%
    Interest Expense (fixed)90,00090,0000%30,00030,0000%
    Net Income30,00078,000160%30,00054,00080%

Thus, the impact of sales increase have been calculated

To determine

Times Interest earned:

Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.

  Times interest earned=Earnings before Interest and TaxInterest expenses

Requirement 4:

The impact of sales decrease by 20% on each company's net income

Expert Solution
Check Mark

Answer to Problem 5BPSB

When sales decrease by 20%, the Net Income of Ellis Company becomes $ 6,000 from $30,000 resulting in 80% decrease over previous profits. For Seidel Company the profit decreases from $ 30,000 to $18,000 resulting in 40% decrease over last profits.

Explanation of Solution

    Ellis CompanySeidel Company
    PresentDecreased sales by 20%Increase /(Decrease ) in %agePresentDecreased sales by 20%Increase /(Decrease ) in %age
    Sales240,000192,000(20%)240,000192,000(10%)
    Variable Expenses 120,00096,000(20%)180,000144,000(10%)
    Income before Interest120,00096,000(20%)60,00048,000(10%)
    Interest Expense (fixed)90,00090,0000%30,00030,0000%
    Net Income30,0006,000(80%)30,00018,000(40%)
To determine

Concept Introduction:

Times Interest earned:

Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.

  Times interest earned=Earnings before Interest and TaxInterest expenses

Requirement 5:

The impact of sales decrease by 50% on each company's net income

Expert Solution
Check Mark

Answer to Problem 5BPSB

When sales decrease by 50%, the Net Income of Ellis Company decreases from $ 30,000 to loss of $30,000 resulting in 200% decrease over last profits. For Seidel Company the profit decreases to nil from $30,000 resulting in 100% decrease over previous profits.

Explanation of Solution

    Ellis CompanySeidel Company
    PresentDecreased sales by 50%Increase /(Decrease ) in %agePresentDecreased sales by 50%Increase /(Decrease ) in %age
    Sales240,000120,000(50%)240,000120,000(50%)
    Variable Expenses 120,00060,000(50%)180,00090,000(50%)
    Income before Interest120,00060,000(50%)60,00030,000(50%)
    Interest Expense (fixed)90,00090,0000%30,00030,0000%
    Net Income30,000(30,000)(200%)30,0000(100%)
To determine

Concept Introduction:

Times Interest earned:

Times interest earned is used to assess the company's ability to meet its interest payment dues. The following formula is used to calculate the ratio.

  Times interest earned=Earnings before Interest and TaxInterest expenses

Requirement 6:

The company having the greater ability to pay interest expenses if sales was to decrease

Expert Solution
Check Mark

Answer to Problem 5BPSB

Seidel Company has the greater ability than Ellis Company to pay interest expense if sales were to decline.

Explanation of Solution

Computation of times Interest earned when sales decline by 20% and 50 % respectively for each company

    Ellis CompanySeidel Company
    Decreased sales by 20%Decreased sales by 50%Decreased sales by 20%Decreased sales by 50%
    Income before Interest96,00060,00048,00030,000
    Interest Expense (fixed)90,00090,00030,00030,000
    Times Interest Earned

      96,00090,000=1.07

      60,00090,000=0.67

      48,00030,000=1.6

      30,00030,000=1

Hence, when sales decline by 20%, times interest earned of Ellis is 1.07 whereas that of Seidel Company is 1.6. When sales decline by 50%, times interest earned of Ellis is 0.67 whereas that of Seidel Company is 1

Hence, Seidel Company always has higher times interest earned when compared to Ellis Company when sales are decreasing. This is considering the fact that Ellis Company have high fixed interest burden of $90,000 whereas the obligation of Seidel Company is only $30,000

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Chapter 11 Solutions

Fundamental Accounting Principles

Ch. 11 - Prob. 11DQCh. 11 - Prob. 12DQCh. 11 - Prob. 13DQCh. 11 - Prob. 14DQCh. 11 - Prob. 15DQCh. 11 - Refer to Samsung’s recent balance sheet in...Ch. 11 - Prob. 1QSCh. 11 - Prob. 2QSCh. 11 - QS 11-3 Unearned revenue C2 Ticketsales, Inc.,...Ch. 11 - Interest-bearing note transactions P1 On November...Ch. 11 - Recording employee payroll taxes P2 On January 15,...Ch. 11 - Prob. 6QSCh. 11 - Accounting for bonuses P4 Noura Company offers an...Ch. 11 - Prob. 8QSCh. 11 - Prob. 9QSCh. 11 - Prob. 10QSCh. 11 - Prob. 11QSCh. 11 - Prob. 12QSCh. 11 - Prob. 13QSCh. 11 - Prob. 14QSCh. 11 - Prob. 15QSCh. 11 - Exercise 11-1 Classifying liabilities C1 The...Ch. 11 - Prob. 2ECh. 11 - Exercise 11-3 Accounting for note payable...Ch. 11 - Exercise 11-4 Interest-bearing notes payable with...Ch. 11 - Exercise 11-5 Computing payroll taxes P2 P3 BMX...Ch. 11 - Exercise 11-6 Payroll-related journal entries...Ch. 11 - Exercise 11-7 Payroll-related journal entries...Ch. 11 - Prob. 8ECh. 11 - Exercise 11-9 Computing payroll taxes P2 P3 Mest...Ch. 11 - Prob. 10ECh. 11 - Prob. 11ECh. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Exercise 11-15 Preparing a balance sheet C1 P2...Ch. 11 - Prob. 16ECh. 11 - Prob. 17ECh. 11 - Prob. 18ECh. 11 - Prob. 19ECh. 11 - Problem 11-1A Short-term notes payable...Ch. 11 - Problem 11-2A Entries for payroll transactions P2...Ch. 11 - Problem 11-3A Payroll expenses, withholdings, and...Ch. 11 - Prob. 4APSACh. 11 - Prob. 5APSACh. 11 - Prob. 6APSACh. 11 - Problem 11-1B Short-term notes payable...Ch. 11 - Problem 11-2B Entries for payroll transactions P2...Ch. 11 - Problem 11-3B Payroll expenses, withholdings, and...Ch. 11 - Prob. 4BPSBCh. 11 - Prob. 5BPSBCh. 11 - Prob. 6BPSBCh. 11 - Review the February 26 and March 25 transactions...Ch. 11 - Bug-Off Exterminators provides pest control...Ch. 11 - Prob. 1GLPCh. 11 - Prob. 1AACh. 11 - Key figures for Apple and Google follow. Apple...Ch. 11 - Prob. 3AACh. 11 - BTN 11-3 Cameron Bly is a sales manager for an...Ch. 11 - Prob. 2BTNCh. 11 - Prob. 3BTNCh. 11 - Prob. 4BTNCh. 11 - Prob. 5BTNCh. 11 - Prob. 6BTN
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