Review the chapter’s opening feature about Jessica Matthews and her start-up company, Uncharted Play. Assume that she is considering expanding her business to open a location in Europe. Assume her current income statement appears as follows.
UNCHARTED PLAY
Income Statement
For Year Ended December 31, 2015
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Operating expenses (55%) . . . . . . . . . 550,000
Net income . . . . . . . . . . . . . . . . . . . . $ 450,000
Uncharted Play currently has no interest-bearing debt. If it expands to open a European location, it will require a $300,000 loan. Uncharted Play has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales at its European location will equal $250,000, and that all expenses at both locations will continue to equal 55% of sales.
Required
1. Prepare an income statement (showing three separate columns for current operations, European, and total) for the company assuming that it borrows the funds and expands to Europe. Annual revenues for current operations are expected to remain at $1,000,000.
2. Compute the company’s times interest earned under the expansion assumptions in part 1.
3. Assume sales at its European location are $400,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
4. Assume sales at its European location are $100,000. Prepare an income statement (with columns for current operations, European, and total) for the company and compute times interest earned.
5. Comment on your results from parts 1 through 4.