14-14 Times interest earned The following data were taken from recent annual rep
ID: 2337838 • Letter: 1
Question
14-14 Times interest earned
The following data were taken from recent annual reports of Caliber Company, which operates a low-fare airline service to more than 50 cities in the United States:
Current Year
Preceding Year
Interest expense
$39,000
$43,000
Income before income tax
265,200
210,700
a. Determine the times interest earned ratio for the current and preceding years. Round to one decimal place.
Current year
Preceding year
b. Although Caliber Company had enough earnings to pay interest in the preceding year, the (IMPROVEMENT/REDUCTIONS)
in this ratio will be (UNWELCOMED/WELCOMED) by the debtholders.
Current Year
Preceding Year
Interest expense
$39,000
$43,000
Income before income tax
265,200
210,700
Explanation / Answer
Times interest earned ratio = (Income before income tax+Interest expense)/Interest expense a Current year 7.8 =(265200+39000)/39000 Preceding year 5.9 =(210700+43000)/43000 b Although Caliber Company had enough earnings to pay interest in the preceding year, the IMPROVEMENT in this ratio will be WELCOMED by the debtholders.
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