Asked by Daisy Farhm on Jul 01, 2024
Verified
Given the following data, determine the times interest earned ratio.
Net income, $70,000
Bonds payable, issued at face value, 8%, $5,000,000
Tax rate is 30%
Interest payable, $6,000
Interest receivable, $1,700
Times Interest Earned
A ratio measuring a company's ability to meet its interest payments based on its operating income, indicating financial health and creditworthiness.
Tax Rate
The percentage at which an individual or corporation is taxed.
Bonds Payable
Long-term debt securities issued by a corporation or government entity, which must be repaid to investors at a specified maturity date.
- Understand and apply the concept of times interest earned ratio in evaluating a company’s ability to meet its interest obligations.
Verified Answer
CP
Cayla Paterson7 days ago
Final Answer :
Times interest earned ratio = (Income before income tax + Interest expense) ÷ Interest expense = [($70,000 ÷ 7%) + (8% × $5,000,000)] ÷ (8% × $5,000,000) = ($100,000 + $400,000) ÷ $400,000 = $500,000 ÷ $400,000 = 1.25
Learning Objectives
- Understand and apply the concept of times interest earned ratio in evaluating a company’s ability to meet its interest obligations.