Dec. 31, 2014 Dec. 31, 2013
Accounts payable $ 924,000 $ 800,000
Current maturities of serial bonds payable 200,000 200,000
Serial bonds payable, 10%, issued 2009, due 2019 1,000,000 1,200,000
Common stock, $10 par value 250,000 250,000
Paid-in capital in excess of par 1,250,000 1,250,000
Retained earnings 860,000 500,000
The income before income tax was $480,000 and $420,000 for the years 2014 and 2013, respectively.
a. Determine the ratio of liabilities to stockholders’ equity at the end of each year. Round to one decimal place.
b. Determine the number of times the bond interest charges are earned during the year for both years. Round to one decimal place.
c. What conclusions can be drawn from these data as to the company’s ability to meet its currently maturing debts?
Answer:
a. Ratio of Liabilities to Stockholders’ Equity = Total Liabilities
Total Stockholders’ Equity
Dec. 31, 2014: $2,124,000
$2,360,000 = 0.9
Dec. 31, 2013: $2,200,000
$2,000,000 = 1.1
Number of Times Bond b. Interest Charges Are Earned = Income Before Income Tax + Interest Expense
Interest Expense
Dec. 31, 2014:
Dec. 31, 2013:
$480,000 + $120,000 *
= $120,000
$420,000 + $140,000 **
= $140,000
5.0
4.0
* ($1,000,000 + $200,000) × 10% = $120,000
** ($1,200,000 + $200,000) × 10% = $140,000
c. Both the ratio of liabilities to stockholders’ equity and the number of times bond interest charges were earned have improved from 2013 to 2014. These results are the combined result of a larger income before income taxes and lower serial bonds payable in the year 2014 compared to 2013.