Times interest earned Aver ill Products Inc. reported the following on the company's income .statement in two recent years: Current Year Prior Year Interest expense $440,000$400,000 Income before income tax expense 5,544,000 4,400,000 a. Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place. b. Is the number of times interest charges are earned improving or declining?

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 14.9BPE
Textbook Problem

Times interest earnedAver ill Products Inc. reported the following on the company's income .statement in two recent years:   Current Year Prior Year Interest expense $440,000$400,000 Income before income tax expense 5,544,000 4,400,000 a. Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place.b. Is the number of times interest charges are earned improving or declining?

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 $5,544,000, and interest expense is given as$440,000.

Times-interest-Â earnedÂ ratio}=Incomeâ€‰beforeâ€‰incomeâ€‰tax+InterestÂ expenseInterestÂ expense=$5,544,000+$440,000$440,000=13.6 Calculate interest earned ratio for prior year, if income before income tax is given as$4,400,000, and interest expense is given as \$400,000

Expert Solution

(b)

To determine

To compare: Times-interest-earned ratio of the current year from the prior year

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