Question

Question: Key figures for Apple and Google follow

	APPLE			GOOGLE
\((million)	Current year	One year prior	Two-year prior	Current year	One year prior	Two-year prior
Net income	\)53,394	\(39,510	\)37,037	\(16,348	\)14,136	$12,733
Income tax	19,121	13,973	13,118	3,303	3,639	2,739
Interest expense	733	384	136	104	101	81

Required

1. Compute times interest earned for the three years’ data shown for each company.
2. Comment on which company appears stronger in its ability to pay interest obligations. Assume an industry average of 10.

Short answer

Answer

1. Times interest earned ratio

	Apple			Google
$(million)	Current year	One year prior	Two-year prior	Current year	One year prior	Two-year prior
Times interest ratio	99.92	140.27	369.78	189.95	176.99	192.01

2.Google appears stronger in its ability to pay interest obligations.

Step-by-step solution

Meaning of Times Interest Earned Ratio

Times interest earned is the number of times interest expense can be covered by operating income. Times interest earned is a measure of solvency. The higher the ratio, the better it is.

$Time interest earned=\frac{\text{Income} \text{before} \text{interest} \text{expense} \text{and} \text{income} \text{taxes}}{\text{interest} \text{expense}}$

Computation of time interest earned ratio   

Computation of Income before tax and interest of Apple Company for all three years:

$(million)	Current year	One year prior	Two-year prior
Net income	$53,394	$39,510	$37,037
Add: Income tax	19,121	13,973	13,118
Add: Interest expense (B)	733	384	136
Income before interest and tax (A)	$73,248	$53,867	$50,291
Times interest earned ratio (A)/(B)	99.92	140.27	369.78

Computation of Income before tax and interest of Google Company for all three years:

$(million)	Current year	One year prior	Two-year prior
Net income	$16,348	$14,136	$12,733
Add: Income tax	3,303	3,639	2,739
Add: Interest expense (B)	104	101	81
Income before interest and tax (A)	$19,755	$17,876	$15,553
Times interest earned ratio (A)/(B)	189.95	176.99	192.01

2. Comment

Google Company appears to be stronger than Apple Company in terms of payment of interest obligations as Google Company has more times the interest earned ratio than apple in the current year and prior one-year period.

Both apple and google company are in a strong position to pay interest obligations as both have a more times interest earned ratio than the industry, which is 10.