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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

Ratio of liabilities to stockholders’ equity and times interest earned

The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years:

  Current Year Previous Year
Accounts payable $ 924,000 $ 800,000
Current maturities of serial bonds payable 200,000 200,000
Serial bonds payable. 10% 1,000,000 1,200,000
Common stock $10 par value 250,000 250,000
Paid-in capital in excess of par 1,250,000 1,250,000
Retained earnings 860,000 500,000

The income before income tax was $480,000 and $420,000 for the current and previous years, respectively.

a. Determine the ratio of liabilities to stockholders’ equity at the end of each year. Round to one decimal place.

b. Determine the times interest earned ratio for both years. Round to one decimal place.

c. What conclusions can be drawn from these data as to the company’s ability to meet its currently maturing debts?

a)

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

To compute: Ratio of liabilities to stockholders’ equity

Given info: Total liabilities and Stockholders’ equity

Explanation

Compute ratio of liabilities to stockholders’ equity for current year. 

 Ratio of liabilities to stockholders' equity}=Total liabilitiesStockholders' equity=$2,124,000$2,360,000=0.9

Compute ratio of liabilities to stockholders’ equity for current year

b)

To determine

To compute: Times interest earned ratio

Given info: Income before income tax and interest expense.

c)

To determine

To provide: Conclusion about company’s ability to meet its currently maturing debt.

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