Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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:

  1. Short-term notes payable represents a 12-month loan that matured in November 2017. Interest of 12% was paid at maturity.
  2. 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.
  3. 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 ? to 1 ? to 1
b. The times interest earned ratio for 2017 ? to 1
c. The debt service coverage ratio for 2017 ? 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 asset turnover ratio is a much better indication of the company's ability to meet its obligations because it looks at the cash from operations .

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Accounting questions

Question

7. Identify four antecedents that influence intercultural contact.

Answered: 1 week ago

Question

5. Describe the relationship between history and identity.

Answered: 1 week ago