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 5PSB

1.

To determine

To compute: Times interest earned of E company.

1.

Expert Solution
Check Mark

Explanation of Solution

Given,

For E company
Income before interest is $120,000.
Interest expense is $90,000.

Times interest earned

Formula to calculate times interest earned,

    Timesinterestearned= Incomebeforeinterestandtax Interestexpense

Substitute $120,000 for income before interest and tax and $90,000 for interest expense.

    Timesinterestearned= $120,000 $90,000 =1.33Times

Thus, times interest earned of E company is 1.33 times.

2.

To determine

To compute: Times interest earned of S company.

2.

Expert Solution
Check Mark

Explanation of Solution

Given,

For S company
Income before interest is $60,000.
Interest expense is $30,000.

Times interest earned

Formula to calculate times interest earned,

    Timesinterestearned= Incomebeforeinterestandtax Interestexpense

Substitute $60,000 for income before interest and tax and $30,000 for interest expense.

    Timesinterestearned= $60,000 $30,000 =2Times

Thus, times interest earned of S company is 2 times.

3.

To determine

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

3.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 10%.

Particulars E Company ($) (given) E Company ($) (10% increased sales) S Company ($) (given) S Company ($) (10% increased sales)
Sales 240,000 264,000 240,000 264,000
Variable expenses 120,000 132,000 180,000 198,000
Income before interest 120,000 132,000 60,000 66,000
Interest expense 90,000 90,000 30,000 30,000
Net Income 30,000 42,000 30,000 36,000
Increase in net income 40% 20%
Table (1)

Working note:

Formula to calculate percentage increase in net income is,

    Percentageincreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company E

    Percentageincreaseinnetincome= $12,000 $30,000 =40%

For Company S

    Percentageincreaseinnetincome= $6,000 $30,000 =20%

Thus, net income of company E gets increased by 40% and company S by 20%.

4.

To determine

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

4.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 40%.

Particulars E Company ($) (given) E Company ($) (40% increased sales) S Company ($) (given) S Company ($) (40% increased sales)
Sales 240,000 336,000 240,000 336,000
Variable expenses 120,000 168,000 180,000 252,000
Income before interest 120,000 168,000 60,000 84,000
Interest expense 90,000 90,000 30,000 30,000
Net Income 30,000 78,000 30,000 54,000
Increase in net income 160% 80%
Table (1)

Working Note:

Formula to calculate percentage increase in net income is,

    Percentageincreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company E

    Percentageincreaseinnetincome= $48,000 $30,000 =160%

For Company S

    Percentageincreaseinnetincome= $24,000 $30,000 =80%

Thus, net income of company E gets increased by 160% and company S by 80%.

5.

To determine

To compute: Net income if sales increase by 90%.

5.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales increase by 90%.

Particulars E Company ($) (given) E Company ($) (90% increased sales) S Company ($) (given) S Company ($) (90% increased sales)
Sales 240,000 456,000 240,000 456,000
Variable expenses 120,000 228,000 180,000 342,000
Income before interest 120,000 228,000 60,000 114,000
Interest expense 90,000 90,000 30,000 30,000
Net Income 30,000 138,000 30,000 84,000
Increase in net income 360% 180%
Table (1)

Working note:

Formula to calculate percentage increase in net income is,

    Percentageincreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company E

    Percentageincreaseinnetincome= $108,000 $30,000 =360%

For Company S

    Percentageincreaseinnetincome= $54,000 $30,000 =180%

Thus, net income of company E gets increased by 360% and company S by 180%.

6.

To determine

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

6.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 20%.

Particulars M Company ($) (given) M Company ($) (20% decreased sales) S Company ($) (given) W Company ($) (20% decreased sales)
Sales 240,000 192,000 240,000 192,000
Variable expenses 120,000 96,000 180,000 144,000
Income before interest 120,000 96,000 60,000 48,000
Interest expense 90,000 90,000 30,000 30,000
Net Income 30,000 6,000 30,000 18,000
Increase in net income -80% -40%
Table (1)

Working note:

Formula to calculate percentage increase in net income is,

    Percentagedecreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company E

    Percentagedecreaseinnetincome= $24,000 $30,000 =80%

For Company S

    Percentagedecreaseinnetincome= $12,000 $30,000 =40%

Thus, Net Income of company E gets decreased 80% and company S by 40%.

7.

To determine

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

7.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 50%.

Particulars E Company ($) (given) E Company ($) (50% decreased sales) S Company ($) (given) S Company ($) (50% decreased sales)
Sales 240,000 120,000 240,000 120,000
Variable expenses 120,000 60,000 180,000 90,000
Income before interest 120,000 60,000 60,000 30,000
Interest expense 90,000 90,000 30,000 30,000
Net Income 30,000 (30,000) 30,000 0
Increase in net income -200% -100%
Table (1)

Working Note:

Formula to calculate percentage increase in net income is,

    Percentagedecreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company E

    Percentagedecreaseinnetincome= $60,000 $30,000 =200%

For Company S

    Percentagedecreaseinnetincome= $30,000 $30,000 =100%

Thus, Net Income of company E gets decreased 200% and company S by 100%.

8.

To determine

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

8.

Expert Solution
Check Mark

Explanation of Solution

Net income if sales decrease by 80%.

Particulars E Company ($) (given) E Company ($) (80% decreased sales) S Company ($) (given) S Company ($) (80% decreased sales)
Sales 240,000 48,000 240,000 48,000
Variable expenses 120,000 24,000 180,000 36,000
Income before interest 120,000 24,000 60,000 12,000
Interest expense 90,000 90,000 30,000 30,000
Net Income 30,000 (66,000) 30,000 (18,000)
Increase in net income -320% -160%
Table (1)

Working note:

Formula to calculate percentage increase in net income is,

    Percentagedecreaseinnetincome= IncreaseinnetIncome Priornetincome

For Company E

    Percentagedecreaseinnetincome= $96,000 $30,000 =320%

For Company S

    Percentagedecreaseinnetincome= $48,000 $30,000 =160%

Thus, Net Income of company E gets decreased 320% and company S by 160%.

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 E are $ 90,000 and in company S are $30,000. Interest expenses are higher in company E than in company S
  • 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, E company enjoys higher percent increase in income in comparison to company S
  • If sales get decreased, S company experiences smaller percent change in net income in comparison to company E.

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Chapter 9 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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