Wiley is wrong?

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  • #183503
    Anonymous
    Inactive

    In the answer, Wiley added back $1 million in interest expense to net income. Shouldn’t you add depreciation instead of interest expense? According to Investopedia, the equation for EBIT is: EBIT = Revenue – COGS- Operating Expenses – Depreciation & Amortization


    35. A company has income after tax of $5.4 million, interest

    expense of $1 million for the year, depreciation expense of

    $1 million, and a 40% tax rate. What is the company’s times interest-

    earned ratio?

    a. 5.4

    b. 6.4

    c. 7.4

    d. 10.0

    35. (d) The requirement is to calculate the times interest earned. Answer (d) is correct because times interest earned is equal to earnings before taxes and interest divided by interest expense, or

    10.0 = [$5.4 million income after interest and taxes/ (1 – .04 tax rate) + $1 million interest expense]/$1 million interest expense.

    Answers (a), (b), and (c) are

    incorrect because they are incorrect computations of the times

    interest earned.

     
    “roger-cpa-review”/
     

Viewing 6 replies - 1 through 6 (of 6 total)
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  • #509998
    jeff
    Keymaster

    Times interest earned = (Net income before tax + Interest expense) / Interest expense

    = ($9 million + $1 million) / $1 million

    = 10.0

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    Jeff Elliott, CPA (KS)
    NINJA CPA | NINJA CMA | NINJA CPE | Another71
    #510041
    jeff
    Keymaster

    Times interest earned = (Net income before tax + Interest expense) / Interest expense

    = ($9 million + $1 million) / $1 million

    = 10.0

    AUD - 79
    BEC - 80
    FAR - 76
    REG - 92
    Jeff Elliott, CPA (KS)
    NINJA CPA | NINJA CMA | NINJA CPE | Another71
    #510000
    mla1169
    Participant

    You were given the income after interest and taxes, and the solution added both back in to get back to EBIT as the starting point.

    FAR- 77
    AUD -49, 71, 84
    REG -56,75!
    BEC -75

    Massachusetts CPA (non reporting) since 3/12.

    #510043
    mla1169
    Participant

    You were given the income after interest and taxes, and the solution added both back in to get back to EBIT as the starting point.

    FAR- 77
    AUD -49, 71, 84
    REG -56,75!
    BEC -75

    Massachusetts CPA (non reporting) since 3/12.

    #510002
    san4596
    Member

    Very simple explaination Jeff. I think your original posting contradicts itself. EBIT = Earning Before Interest & Taxes. The only expenses added back are interest and taxes. Investopedia is a great source of information, but does not always explain things correctly.

    CPA EXAM: DONE!!!!
    Ethics Course: Passed
    Application Mailed: 3/16/15
    Professional Conduct Exam: 97
    Certification Date: 4/2/15!!!

    #510045
    san4596
    Member

    Very simple explaination Jeff. I think your original posting contradicts itself. EBIT = Earning Before Interest & Taxes. The only expenses added back are interest and taxes. Investopedia is a great source of information, but does not always explain things correctly.

    CPA EXAM: DONE!!!!
    Ethics Course: Passed
    Application Mailed: 3/16/15
    Professional Conduct Exam: 97
    Certification Date: 4/2/15!!!

Viewing 6 replies - 1 through 6 (of 6 total)
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