Ratio of Liabilities to Stockholders\' Equity and Times Interest Earned The foll

Question

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:

The income before income tax was $469,800 and $411,100 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. The ratio of liabilities to stockholders' equity has improved and the times interest earned ratio has improved from the previous year. These results are the combined result of a larger income before income taxes and lower interest expense in the current year compared to the previous year.

Current Year Previous Year Accounts payable $522,000 $140,000 Current maturities of serial bonds payable 320,000 320,000 Serial bonds payable, 10% 1,300,000 1,620,000 Common stock, $1 par value 60,000 70,000 Paid-in capital in excess of par 670,000 680,000 Retained earnings 2,330,000 1,850,000

Explanation / Answer

1 Ratio of Liabilities to Stockholders’ Equity = Total Liabilities / Total Stockholders' Equity Current Year $(522,000 + 320,000 + 1,300,000) / (60,000 + 670,000 + 2,3300,000) '=$2,142,000/$3,060,000 = 0.70 Previous Year = $(140,000+320,000+1,620,000)/(70,000+680,000+1,850,000) = $2,080,000/$2,600,000 = 0.80 2 Times Interest Earned Ration = (Total bond Payable * interest rate = (Current maturity of bond payable+ Seriable Vond Payable)*intt rate Current Year = $(320,000+1,300,000)*10% = $162,000 Previous Year = $(320,000+1,620,000)*10% = $194,000

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