Question
Blackmun Corp signed a 3 year non-cancelable lease for certain machinery on Dec 31, 2018. The terms of the lease called for Blackmun Corp to
Blackmun Corp signed a 3 year non-cancelable lease for certain machinery on Dec 31, 2018. The terms of the lease called for Blackmun Corp to make equal annual payments of $15600 at the end of each year for 3 years, with title to pass to Blackmun Corp at the end of this period. The first payment is made one year after the lease is signed on Dec 31, 2018. The machinery has an estimated useful life of 3 years and no salvage value. Blackmun Corp uses the straight-line method of depreciation for all of its fixed assets. The effective interest rate for the lease was 6.6%.
Income Statement For: 2019
◊―――――――――――――――――――――――――――――◊
Operating Income: 119,232
Earnings from affiliates: 0
Earnings Before Interest and Taxes: 119,232
Interest expense: 4,950
Earnings before Taxes: 114,282
Provision for Taxes on Income: 31,999
Net income: 82,283
◊―――――――――――――――――――――――――――――◊
The company had initially accounted for the lease as an operating lease and the figures above were produced using that assumption. Later the company decided to account for the lease as a capital lease. With the lease accounted for as a capital lease, the Times Interest Earned Ratio for 2019 is:
| Periods: Present value at 6.6% |
| 1: 0.9381 | | 2: 0.88 | | 3: 0.8255 | | 4: 0.7744 | | 5: 0.7265 |
| 6: 0.6815 | | 7: 0.6393 | | 8: 0.5997 |
| Periods: Present value Annuity at 6.6% |
| 1: 0.9381 | | 2: 1.8181 | | 3: 2.6436 | | 4: 3.418 | | 5: 4.1445 |
| 6: 4.826 | | 7: 5.4653 | | 8: 6.065 |
THE KEY PART OF THE QUESTION IS "The company had initially accounted for the lease as an operating lease and the figures above were produced using that assumption. Later the company decided to account for the lease as a capital lease. With the lease accounted for as a capital lease, the Times Interest Earned Ratio for 2019 is:"
Otherwise I believe the answer would simply be EBIT/Total Interest Expense or 119232 / 4950
A | 119232 / 7672 | |
B | 119232 / 2722 | |
C | 119232 / 4950 | |
D | 132979 / 7672 | |
E | 132979 / 2722 | |
F | 132979 / 4950 | |
G | 121085 / 7672 | |
H | 121085 / 2722 | |
I | 121085 / 4950 |
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