Problem 1 Reading 36. How does the text come up with net income of 869??? Tax rate is 35% and pretax income is 1695. Prolly something so silly, but I can’t figure it out. The text has the same style as my old accounting books from college… Doesn’t show all the steps… that drives me bonkers! Thanks.
do you mind posting the problem? what what you said net income should be: NI = Pretax Income *(1-tax rate) = 1695*(1-.35) = 1,101.75
Interest Expense 401 Pretax Income 1789 NI 930 Capitalized Interest 141 Amortization of capitalized interest 47 EBIT 2190 Times interest earned 5.46 recompute the earnings coverage ratio for each year (assuming expensed interest as incurred) Recompute NI (assume a 35% tax rate) Here are the new numbers Net Cap Interest 94 (how do we get this???) After Tax 61 Interest expense 542 EBIT 2237 Times Interest Earned 4.13 Pretax Income 1695 NI 869
> Net Cap Interest 94 (how do we get this???) $141 -$47 = $94 > After Tax 61 $94 * 0.65 = $61 > Interest expense 542 $401 + $141 = $542 This is a partial answer, I think the problem is a bit tough.
ok. I see the net cap interest. I figured out the 542. Ya the problem is a bit tough. Thats why I hate it when the book doesnt give the full explanation. ITs so annoying. I literally stared at this problem last night for 20minutes… maybe more.
Maybe it’ll help if you think about it this way: The total capitalized interest is 147 and the amortization of interest is 47. Assuming all interest is expensed as inccurred entails assuming that all the 147 capitalized interest is an interest expense. However, the amortized interest (the $47) was already included in the first computation of net income, leaving $94 on the balance sheet. So we need to subtract the 47 from the 147 and subtract the result net of tax to the original NI. All necessary ratios can then be derived from the adjusted net income.
kguizo Wrote: ------------------------------------------------------- > Maybe it’ll help if you think about it this way: > The total capitalized interest is 147 and the > amortization of interest is 47. Assuming all > interest is expensed as inccurred entails assuming > that all the 147 capitalized interest is an > interest expense. However, the amortized interest > (the $47) was already included in the first > computation of net income, leaving $94 on the > balance sheet. So we need to subtract the 47 from > the 147 and subtract the result net of tax to the > original NI. All necessary ratios can then be > derived from the adjusted net income. Very Nice explanation.
Not to confuse an already confusing problem, kguizo meant $141, not $147. How did they get $930 for NI, anyway? Pretax income is 1789, and the tax rate is 35%? I assume pretax income already includes all interest charges, so only tax is left to be taken out…