Impact of including equity earnings from the coverage Why should.docx

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Impact of including equity earnings from the coverage? Why should equity income be excluded from the times interest earned coverage P 7-9 Allen Company and Barker Company are competitors in the same industry financial data from their 2011 statements follow. Balance Sheet December 31, 2011 Allen Company Barker Company Cash $ 10,000 $ 35,000 Accounts receivable 45,000 120,000 Inventory 70,000 190,000 Investments 40,000 100,000 Intangibles 11,000 20,000 180,000 520,000 Property, plant, and equipment $356,000 Total assets $985,000 (continued) Term Debt-Paying Ability (P 7-9 CONTINUED) Accounts payable Bonds payable Preferred stock, $1 par Common stock, $10 par Retained earnings Total liabilities and capital Allen Company $ 60,000 100,000 50,000 100,000 46,000 $356,000 Barker Company $165,000 410,000 30,000 280,000 100,000 $985,000 Barker Company $2,800,000 2,050,000
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Unformatted text preview: 580,000 32,000 65,000 $ 73,000 Income Statement For the Year Ended December 31, 2011 Allen Company Sales $1,050,000 Cost of goods sold 725,000 Selling and administrative expenses 230,000 Interest expense 10,000 Income taxes 42,000 Net income $ 43,000 Industry Averages: Times interest earned Debt ratio Debt/equity Debt to tangible net worth Required a. Compute the following ratios for each company: 1. Times interest earned 2. Debt ratio 3. Debt/equity ratio 4. Debt to tangible net worth 7.2 times 40.3% 66.6% 72.7% b. Is Barker Company in a position to take on additional long-term debt? Explain. c. Which company has the better long-term debt position? Explain. P 7-10 Consecutive five-year balance sheets and income statements of Laura Gibson CUT f Laura Gibson Corpo- ration are shown below and on the following page....
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