C Company has 10-year bonds that require the company to maintain a times-interest earned ratio above 5.0. A times-interest earned ratio below 5.0 results in the C Company defaulting on the bonds and having to pay back any outstanding amount on the bonds immediately. Complete the following steps to calculate the times-interest earned ratio and determine if it meets the debt covenant for the current year.

a. C Company has long-term liabilities consisting of 4%, 10-year bonds of $20,000. What is the interest expense for the year?

b. Total sales were $18,000 and gross profit rate was 60%. What is gross profit?

c. Based on your answer to letter b above and selling and other operating expenses of $4,900 (including $1,000 of depreciation but excluding interest expense calculated in a), what is income before taxes?

d. Based on your answer in letter c above, if the tax rate is 20%, what is net income?

e. What is the times-interest earned?

f. Did C Company default on the debt covenant this year? Otherwise stated, did the C Company achieve a times-interest earned ratio less than 5.0 that would require it to pay back all outstanding bonds immediately?