Q13SE - Horngren'S Financial And Managerial Accounting

Question

Question:Abernathy Electronics reported the following amounts on its 2018 income statement: Year Ended December 31, 2018 Net income $ 45,000 Income tax expense 6,750 Interest expense 3,750 What is Abernathy’s times-interest-earned ratio for 2018? (Round to two decimals.)

Step-by-Step Solution

Answer

Answer

 

Times interest earned ratio is 14.80.

 

Step 1: Definition

The interest coverage ratio, sometimes referred to as the times interest earned (TIE) ratio. It gauges how readily a business can settle its debts with its current income.

Step 2: Calculation of Times interest earned ratio:

$$\begin{gathered} \mathit{T}\mathit{i}\mathit{m}\mathit{e}\mathit{s}\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathit{E}\mathit{a}\mathit{r}\mathit{n}\mathit{e}\mathit{d}\mathit{R}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathbf{=}\frac{\mathbf{EBIT}}{\mathbf{InterestExpenses}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{45}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{750}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{750}}{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{750}} \\ \mathbf{=}\frac{\mathbf{\$}\mathbf{55}\mathbf{,}\mathbf{500}}{\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{750}} \\ \mathbf{=}\mathbf{14}\mathbf{.}\mathbf{80} \end{gathered}$$