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Question 29

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Selected data from Kamal Company's financial statements is as follows:

In $000's

2017

2016

Current liabilities

$ 5,130

$ 5,202

Long-term debt

1,419

1,322

Stockholders' equity

12,632

11,166

Interest and principal payments

300

400

Net income

2,430

2,280

Interest expense

196

172

Income taxes

1,837

1,524

Dividends paid

750

750

Kamal Company's times interest earned ratio for 2017

Select one:

A. increased, which indicates the company's creditors will be pleased.

B. indicates the company cannot meet its current year interest payments out of current year earnings.

C. decreased slightly, which indicates the company has about the same ability to pay interest on its debt.

D. shows an increase in the company's ability to make its interest payments.

Answer 1

Times Interest earned ratio for 2016 = Net Income before Interest expense and Income tax / Interest Expense

= (2,280,000 +172,000 + 1,524,000) / 172,000

= 23.12 times

Times Interest earned ratio for 2017 = Net Income before Interest expense and Income tax / Interest Expense

= (2,430,000 + 196,000 + 1,837,000) / 196,000

= 22.77 times

Answer :

Option C) Decrease Slightly , which indicates the company has about the same ability to pay interest on its debt.