Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
Question
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Chapter 9, Problem 5PSA

1.

To determine

To compute: Times interest earned of M Company.

1.

Expert Solution
Check Mark

Explanation of Solution

Given,

For M company
Income before interest is $200,000.
Interest expense is $60,000.

Times interest earned

Formula to calculate times interest earned,

    Timesinterestearned= Incomebeforeinterestandtax Interestexpense

Substitute $200,000 for income before interest and tax and $60,000 for interest expense.

    Timesinterestearned= $200,000 $60,000 =3.33times

Thus, times interest earned of M Company is 3.33 times.

2.

To determine

To compute: Times interest earned of W Company.

2.

Expert Solution
Check Mark

Explanation of Solution

Given,

For W company
Income before interest is $400,000.
Interest expense is $260,000.

Times interest earned

Formula to calculate times interest earned,

    Timesinterestearned= Incomebeforeinterestandtax Interestexpense

Substitute $400,000 for income before interest and tax and $260,000 for interest expense.

    Timesinterestearned= $400,000 $260,000 =1.54times

Thus, times interest earned of W company is 1.54 times.

3.

To determine

To compute: Net income if sales increase by 30%.

3.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 30%.

Particulars M Company ($) (given) M Company ($) (30% increased sales) W Company ($) (given) W Company ($) (30% increased sales)
Sales 1000,000 1,300,000 1,000,000 1,300,000
Variable expenses 800,000 1,040,000 600,000 780,000
Income before interest 200,000 260,000 400,000 520,000
Interest expense 60,000 60,000 260,000 260,000
Net income 140,000 200,000 140,000 260,000
Increase in net income 43% 86%
Table (1)

Working note:

Formula to calculate percentage increase in net income,

    Percentageincreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company M

    Percentageincreaseinnetincome= $60,000 $140,000 =43%

For Company W

    Percentageincreaseinnetincome= $120,000 $140,000 =86%

Thus, net income of Company M gets increased by 43% and Company W by 86%.

4.

To determine

To compute: Net income if sales increase by 50%.

4.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 50%.

Particulars M Company ($) (given) M Company ($) (50% increased sales) W Company ($) (given) W Company ($) (50% increased sales)
Sales 1000,000 1,500,000 1,000,000 1,500,000
Variable expenses 800,000 1,200,000 600,000 900,000
Income before interest 200,000 300,000 400,000 600,000
Interest expense 60,000 60,000 260,000 260,000
Net Income 140,000 240,000 140,000 340,000
Increase in net income 71% 143%
Table (1)

Working Note:

Formula to calculate percentage increase in net income,

    Percentageincreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company M

    Percentageincreaseinnetincome= $100,000 $140,000 =71%

For Company W

    Percentageincreaseinnetincome= $200,000 $140,000 =143%

Thus, net income of Company M gets increased by 71% and Company W by 143%.

5.

To determine

To compute: Net income if sales increase by 80%.

5.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 80%.

Particulars M Company ($) (given) M Company ($) (80% increased sales) W Company ($) (given) W Company ($) (80% increased sales)
Sales 1000,000 1,800,000 1,000,000 1,800,000
Variable expenses 800,000 1,440,000 600,000 1,080,000
Income before interest 200,000 360,000 400,000 720,000
Interest expense 60,000 60,000 260,000 260,000
Net Income 140,000 300,000 140,000 460,000
Increase in net income 114% 229%
Table (1)

Working Note:

Formula to calculate percentage increase in net income,

    Percentageincreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company M

    Percentageincreaseinnetincome= $160,000 $140,000 =114%

For Company W

    Percentageincreaseinnetincome= $320,000 $140,000 =229%

Thus, net income of Company M gets increased by 114% and Company W by 229%.

6.

To determine

To compute: Net income if sales decrease by 10%.

6.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 10%.

Particulars M Company ($) (given) M Company ($) (10% decreased sales) W Company ($) (given) W Company ($) (10% decreased sales)
Sales 1000,000 900,000 1,000,000 900,000
Variable expenses 800,000 720,000 600,000 540,000
Income before interest 200,000 180,000 400,000 360,000
Interest expense 60,000 60,000 260,000 260,000
Net Income 140,000 120,000 140,000 100,000
Increase in net income -14% -29%
Table (1)

Working note:

Formula to calculate percentage increase in net income,

    Percentagedecreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company M

    Percentagedecreaseinnetincome= $20,000 $140,000 =14%

For Company W

    Percentagedecreaseinnetincome= $40,000 $140,000 =29%

Thus, net income of Company M gets decreased 14% and Company W by 29%.

7.

To determine

To compute: Net income if sales decrease by 20%.

7.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 20%.

Particulars M Company ($) (given) M Company ($) (20% decreased sales) W Company ($) (given) W Company ($) (20% decreased sales)
Sales 1000,000 800,000 1,000,000 800,000
Variable expenses 800,000 640,000 600,000 480,000
Income before interest 200,000 160,000 400,000 320,000
Interest expense 60,000 60,000 260,000 260,000
Net Income 140,000 100,000 140,000 60,000
Increase in net income -29% -57%
Table (1)

Working Note:

Formula to calculate percentage increase in net income,

    Percentagedecreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company M

    Percentagedecreaseinnetincome= $40,000 $140,000 =29%

For Company W

    Percentagedecreaseinnetincome= $80,000 $140,000 =57%

Thus, net income of Company M gets decreased 29% and Company W by 57%.

8.

To determine

To compute: Net income if sales decrease by 40%.

8.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 40%.

Particulars M Company ($) (given) M Company ($) (40% decreased sales) W Company ($) (given) W Company ($) (40% decreased sales)
Sales 1000,000 600,000 1,000,000 600,000
Variable expenses 800,000 480,000 600,000 360,000
Income before interest 200,000 120,000 400,000 240,000
Interest expense 60,000 60,000 260,000 260,000
Net Income 140,000 60,000 140,000 (20,000)
Increase in net income -57% -114%
Table (1)

Working note:

Formula to calculate percentage increase in net income,

    Percentagedecreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company M

    Percentagedecreaseinnetincome= $80,000 $140,000 =57%

For Company W

    Percentagedecreaseinnetincome= $160,000 $140,000 =114%

Thus, net income of Company M gets decreased 57% and Company W by 114%.

9.

To determine

Relation to fixed cost strategies of the two companies.

9.

Expert Solution
Check Mark

Explanation of Solution

Relation to fixed cost strategies of the two companies,

  • Here in this case fixed cost refers to interest expenses.
  • Interest expenses in Company M are $ 60,000 and in Company W are $260,000. Interest expenses are higher in company W than in Company M.
  • Due to higher interest expenses, change in net income gets more effected due to change in sales.
  • Higher fixed cost is inversely related to times interest earned method.
  • So if sales get increased, W Company enjoys higher percent increase in income in comparison to Company M.
  • If sales get decreased, M Company experiences smaller percent change in net income in comparison to Company W.

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Chapter 9 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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