Ratio of Liabilities to Stockholders\' Equity and Times Interest Earned The foll
ID: 2511829 • Letter: R
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 $1,102,000 and $964,300 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.
Current Year Previous Year Accounts payable $502,000 $307,000 Current maturities of serial bonds payable 510,000 510,000 Serial bonds payable, 10% 2,390,000 2,900,000 Common stock, $1 par value 100,000 130,000 Paid-in capital in excess of par 1,070,000 1,070,000 Retained earnings 3,690,000 2,930,000Explanation / Answer
SOLUTION
(A) Ratio of Liabilities to Stockholders’ Equity = Total Liabilities / Total Stockholders' Equity
Current Year-
= ($502,000 + $510,000 + $2,390,000) / ($100,000 + $1,070,000 + $3,690,000)
= $3,402,000 / $4,860,000
= 0.7
Previous year -
= ($307,000 + $510,000 + $2,900,000) / ($130,000 + $1,070,000 + $2,930,000)
= $3,717,000 / $4,130,000
= 0.9
(B) Current Year-
Interest = Current and long term maturties of bonds payable *10%
= ($510,000 + $2,390,000) * 10% = $290,000
Income + Interest =$1,102,000 + $290,000 = $1,392,000
Interest earned ratio = $1,392,000 / $290,000 = 4.80
Previous year-
Interest = Current and long term maturties of bonds payable *10%
= ($510,000 + $2,900,000) * 10% = $341,000
Income + Interest = $964,300 + $341,000 = $1,305,300
Interest earned ratio = $1,305,300 / $341,000 = 3.83
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