26. Solvency Ratios LO5 The following information was taken from the financial s
ID: 2760585 • Letter: 2
Question
26.
Solvency Ratios LO5
The following information was taken from the financial statements of TKO Company:
2012
2011
Total assets
$200,000
$125,000
Total liabilities
75,000
75,000
Total equity
125,000
50,000
Operating income
35,000
30,000
Interest expense
7,000
7,500
Required
Compute the debt to assets ratio, the debt to equity ratio, and times interest earned for both years.
2012
2011
Total assets
$200,000
$125,000
Total liabilities
75,000
75,000
Total equity
125,000
50,000
Operating income
35,000
30,000
Interest expense
7,000
7,500
Explanation / Answer
For the year 2011:
Debt to assets ratio = Total liabilities / total assets
= 75000 / 125000 = 0.6
Debt to equity ratio = Total liabilities / total equity
= 75000 / 50000 = 1.5
Times interest earned ratio = Operating income / interest expense
= 30000 / 7500 = 4
For the year 2012:
Debt to assets ratio = 75000 / 200000 = 0.38
Debt to equity ratio = 75000 / 125000 = 0.6
Times interest earned ratio = 35000 / 7000 = 5
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