Question

mnect Assis Ch 13 Quiz newconnect.mheducation.com Help Save & E- TB MC Qu. 13-143 Ron Landscapings income... Ron Landscaping's income statement reports net income of $75,300, which includes deductions for interest expense of $11.500 and incom taxes of $34,900. Its times interest earned is Multiple Choice 0 106 times 0 75 times 0 40 times < Prev 2 of 20 Next > to search

Answer 1

Answer:

The times interest earned ratio is calculated by dividing income before interest and income taxes by the interest expense.

Times interest earned

= Income before Interest and Taxes/Interest expense

= ($75,300+$11,500+$34,900)/$11,500

= $121,700/$11,500

= 10.6 times ( Rounded off )

Note:

The times interest earned ratio, sometimes called the interest coverage ratio, is a coverage ratio that measures the proportionate amount of income that can be used to cover interest expenses in the future.

In some respects the times interest ratio is considered a solvency ratio because it measures a firm’s ability to make interest and debt service payments. Since these interest payments are usually made on a long-term basis, they are often treated as an ongoing, fixed expense. As with most fixed expenses, if the company can’t make the payments, it could go bankrupt and cease to exist. Thus, this ratio could be considered a solvency ratio.

Thank you.