# 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?

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

### Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

#### Solutions

Chapter
Section
Chapter 14, Problem 14.16EX
Textbook Problem

## Times interest earnedlacouva 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?

Expert Solution

(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 of Solution

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

Expert Solution

(b)

To determine

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

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