Question
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
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: December 31 2017 2016 Accounts payable $ 65,000 $ 50,000 Accrued liabilities 25,000 35,000 Taxes payable 60,000 45,000 Short-term notes payable 0 75,000 Bonds payable due within next year 200,000 200,000 Total current liabilities $ 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 2017 Sales revenue $1,600,000 Cost of goods sold 950,000 Gross profit $ 650,000 Selling and administrative expense 300,000 Operating income $ 350,000 Interest expense 89,000 Income before tax $ 261,000 Income tax expense 111,000 Net income $ 150,000 Other Information: Short-term notes payable represents a 12-month loan that matured in November 2017. Interest of 12% was paid at maturity. One million dollars of serial bonds had been issued ten years earlier. The first series of $200,000 matured at the end of 2017, with interest of 8% payable annually. Cash flow from operations was $185,000 in 2017. The amounts of interest and taxes paid during 2017 were $89,000 and $96,000, respectively. Required: 1. Compute the following for Impact Company. Round your answers to two decimal places. 2017 2016 a. The debt-to-equity ratio at December 31, 2017, and December 31, 2016 fill in the blank 1 0.58 to 1 fill in the blank 2 0.80 to 1 b. The times interest earned ratio for 2017 fill in the blank 3 3.93 to 1 c. The debt service coverage ratio for 2017 fill in the blank 4 1 times 2. The company's debt-to equity ratio has decreased . The ratio is low with respect to the equity of the company. The times interest earned ratio indicates that Impact's profits before interest and taxes were almost four times the amount of interest expense . It is not wise to use the times interest earned ratio as the only indicator of solvency because it considers only the payment of interest and not the payment of principal . In addition, these payments must be made with cash not profits . The debt service coverage ratio is a much better indication of the company's ability to meet its obligations because it looks at the cash from operations . Feedback
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