Solvency Analysis The following information is available from the balance sheets at the ends of the two most recent years and the income statement for the most recent year of Impact Company:

Other Information

a. Short-term notes payable represents a 12-month loan that matured in November 2008. Interest of 12% was paid at maturity.

b. One million dollars of serial bonds had been issued ten years earlier. The first series of $200,000 matured at the end of 2008, with interest of 8% payable annually.

c. Cash flow from operations was $185,000 in 2008. The amounts of interest and taxes paid during 2008 were $89,000 and $96,000, respectively.
Required 1. Compute the following for Impact Company:

a. The debt-to-equity ratio at December 31, 2008, and December 31, 2007

b. The times interest earned ratio for 2008

c. The debt service coverage ratio for 2008 2. Comment on Impact’s solvency at the end of 2008. Do the times interest earned ratio and the debt service coverage ratio differ in their indication of Impact’s ability to pay its debts?
Explain.

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December 31 2008 2007 Accounts payable $ 65,000 $ 50,000 Accrued liabilities Taxes payable 25,000 35,000 60,000 45,000 Short-term notes payable Bonds payable due within next year Total current liabilities 0 75,000 200,000 200,000 $ 350,000 $ 405,000 Bonds payable $ 600,000 $ 800,000 Common stock, $10 par $1,000,000 $1,000,000 Retained earnings 650,000 500,000 Total stockholders' equity $1,650,000 $1,500,000 Total liabilities and stockholders' equity $2,600,000 $2,705,000 Sales revenue Cost of goods sold Gross profit Selling and administrative expense Operating income Interest expense Income before tax Income tax expense Net income 2008 $1,600,000 950,000 $ 650,000 300,000 $ 350,000 89,000 $ 261,000 111,000 $ 150,000