Textbook Problem

To determine: Times interest earned ratio

Given info: Income before income tax and interest expense.

Solution:

Calculate interest earned ratio.

$\begin{array}{c}\begin{array}{l}\text{Times-interest-}\\ \text{earned ratio }\end{array}\}=\frac{\text{Income before income tax}+\text{Interest expense}}{\text{Interest expense}}\\ =\frac{\$8,000,000+\$500,000}{\$500,000}\\ =17.0\text{ times}\end{array}$

Explanation:

Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense.

Formula:

$\begin{array}{l}\text{Times-interest-}\\ \text{earned ratio }\end{array}\}=\frac{\text{Income before income tax}+\text{Interest expense}}{\text{Interest expense}}$

Conclusion:

Therefore, times interest earned ratio is 17.0 times.