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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Times interest earned

lacouva Company reported the following on the company's income statement for two recent years:

  Current Year Prior Year
Interest expense $5,000,000

$5,000,000

Income before income tax expense 3,500,000

6,000,000

a. Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place.

b. What conclusions can you draw?

(a)

To determine

Times-Interest-Earned ratio: It is the ratio that quantify a business ability to pay interest expense. It is calculated as shown below:

Times-interest-earned ratio}=Incomebeforeincometax+Interest expenseInterest expense

To calculate: Times-interest-earned ratio for the current year and the prior year.

Explanation

Calculate interest earned ratio for current year, if income before income tax is given as $3,500,000, and interest expense is given as $5,000,000.

Times-interest- earned ratio}=Incomebeforeincometax+Interest expenseInterest expense=$3,500,000+$5,000,000$5,000,000=1.7

Calculate interest earned ratio for prior year, if income before income tax is given as $6,000,000, and interest expense is given as $5,000,000

(b)

To determine

To draw: The conclusion of Company’s times-interest-earned ratio

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