E13-5 (Algo) Computing a Commonly Used Solvency Ratio [LO 13-4, 13-5]

According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Lets see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2016.

	2016				2015
Sales Revenue		$	116,000			$	144,000
Cost of Goods Sold			68,000				77,900
Gross Profit			48,000				66,100
Selling, General, and Administrative Expenses			37,600				40,200
Interest Expense			660				555
Income before Income Tax Expense			9,740				25,345
Income Tax Expense			2,000				6,600
Net Income		$	7,740			$	18,745

Required:

1. Compute the times interest earned ratios for 2016 and 2015. (Round your answers to 1 decimal place.)

2. Does Computer Tycoon generate sufficient net income in both years (before taxes and interest) to cover the cost of debt financing?

multiple choice

• Yes

• No