The following data were taken from the financial statements of Hermes Inc. for D
ID: 2350062 • Letter: T
Question
The following data were taken from the financial statements of Hermes Inc. for December 31, 2012 and 2011:*Accounts Payable
Dec. 31, 2012: 473,960
Dec. 31, 2011: 325,000
*Current Maturities of serial bonds payable
Dec. 31, 2012: 500,000
Dec. 31, 2011: 500,000
*Serial bonds payable, 9%, issues 2007, due 2017
Dec. 31, 2012: 2,500,000
Dec. 31, 2011: 3,000,000
*Common stock, $1 par value
Dec. 31, 2012: 100,000
Dec. 31, 2011: 100,000
*Paid-in capital in excess of par
Dec. 31, 2012: 1,200,000
Dec. 31, 2011: 1,200,000
*Retained earnings
Dec. 31, 2012: 3,662,800
Dec. 31, 2011: 2,950,000
The income before income tax was $891,000 and $787,500 for the years 2012 and 2011, respectively.
a. Determine the ratio of liabilities to stockholders' equity at the end of each year. Round to one decimal place.
Dec. 31, 2012:
Dec. 31, 2011:
b. Determine the number of times the bond interest charges are earned during the year for both years. Round to one decimal place.
Dec. 31, 2012:
Dec. 31, 2011:
c. What conclusions can be drawn from these data as to the company's ability to meet its currently maturing debts?
Explanation / Answer
a.
Dec. 31, 2012:
Liabilities:
473,960
equity:
100,000
500,000
1,200,000
2,500,000
3,662,800
total
3,473,960
total
4,962,800
ratio:
0.7
(3,473,960/3,962,800)
Dec. 31, 2011:
Liabilities:
325,000
equity:
100,000
500,000
1,200,000
3,000,000
2,950,000
Total
3,825,000
Total
4,250,000
ratio:
0.9
(3,825,000/4,250,000)
b.
Dec. 31, 2012:
Interest:
270000
(2,500,000+500,000)*.09
times interest earned:
4.3
(891,000+270,000)/270,000
Dec. 31, 2012:
Interest:
315000
(3,000,000+500,000)*.09
times interest earned:
3.5
(787,500+315,000)/315,000
c. Liabilities to equity ratio and times interest earned are both measures of solvency. Both improved from 2011 to 2012. This suggests that the company's ability to pay debts has improved.
a.
Dec. 31, 2012:
Liabilities:
473,960
equity:
100,000
500,000
1,200,000
2,500,000
3,662,800
total
3,473,960
total
4,962,800
ratio:
0.7
(3,473,960/3,962,800)
Dec. 31, 2011:
Liabilities:
325,000
equity:
100,000
500,000
1,200,000
3,000,000
2,950,000
Total
3,825,000
Total
4,250,000
ratio:
0.9
(3,825,000/4,250,000)
b.
Dec. 31, 2012:
Interest:
270000
(2,500,000+500,000)*.09
times interest earned:
4.3
(891,000+270,000)/270,000
Dec. 31, 2012:
Interest:
315000
(3,000,000+500,000)*.09
times interest earned:
3.5
(787,500+315,000)/315,000
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