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Chapter 11: Q13SE (page 606)

Question:Abernathy Electronics reported the following amounts on its 2018 income statement: Year Ended December 31, 2018 Net income $ 45,000 Income tax expense 6,750 Interest expense 3,750 What is Abernathy’s times-interest-earned ratio for 2018? (Round to two decimals.)

Short Answer

Expert verified

Answer

Times interest earned ratio is14.80.

Step by step solution

01

Definition

The interest coverage ratio, sometimes referred to as the times interest earned (TIE) ratio. It gauges how readily a business can settle its debts with its current income.

02

Calculation of Times interest earned ratio:

TimesInterestEarnedRatio=EBITInterestExpenses=$45,000+$6,750+$3,750$3,750=$55,500$3,750=14.80

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Most popular questions from this chapter

List the required employee payroll withholding deductions, and provide the tax rate for each.

Liam Wallace is general manager of Moonwalk Salons. During 2018, Wallace worked for the company all year at a \(13,400 monthly salary. He also earned a year-end bonus equal to 5% of his annual salary.

Wallace’s federal income tax withheld during 2018 was \)2,010 per month, plus \(1,608 on his bonus check. State income tax withheld came to \)110 per month, plus \(80 on the bonus. FICA tax was withheld on the annual earnings. Wallace authorized the following payroll deductions: Charity Fund contribution of 2% of total earnings and life insurance of \)15 per month.

Moonwalk incurred payroll tax expense on Wallace for FICA tax. The company also paid state unemployment tax and federal unemployment tax.

Requirements

1. Compute Wallace’s gross pay, payroll deductions, and net pay for the full year 2018. Round all amounts to the nearest dollar.

2. Compute Moonwalk’s total 2018 payroll tax expense for Wallace.

3. Make the journal entry to record Moonwalk’s expense for Wallace’s total earnings for the year, his payroll deductions, and net pay. Debit Salaries Expense and Bonus Expense as appropriate. Credit liability accounts for the payroll deductions and Cash for net pay. An explanation is not required.

4. Make the journal entry to record the accrual of Moonwalk’s payroll tax expense for Wallace’s total earnings.

5. Make the journal entry for the payment of the payroll withholdings and taxes.

What are the two main controls for payroll? Provide an example of each.

What is the difference between gross pay and net pay?

When do businesses record warranty expenses, and why?
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