According to the producer price index database maintained by the Bureau of Labor

Question

According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 8.1 percent between 2012 and 2013. Let's see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2013 2013 2012 Sales Revenue Cost of Goods Sold $120,000 $150,000 70,000 79,500 Gross Profit Selling, General, and Administrative Expenses Interest Expense 50,000 70,500 38,000 700 41,000 575 Income before Income Tax Expense Income Tax Expense 11,300 28,925 2,500 7,000 Net Income $ 8,800 S 21,925 Required 1. Compute the times interest earned ratios for 2013 and 2012. (Round your answers to 1 decimal place.) Times Interest Earned 2012 2013 2. Does Computer Tycoon generate sufficient net income (before taxes and interest) to cover the cost of debt financing? O Yes No

Explanation / Answer

1. Calculation of Earning before interest & taxes

2. Yes, Computer tycoon generate sufficient net income to cover the cost of debt financing.

EBIT of 2012 = 12000

EBIT of 2013 = 29500

that is sufficiently cover the cost of debt financing.

Particulars 2012 2013 Earning before taxes 11300 28925 Add : Interest Expense 700 575 Earning before interest & taxes 12000 29500

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