Question

Sales are $1.44 million, cost of goods sold is $570,000, depreciation expense is $144,000, other operating expenses is $294,000, addition to retained earnings is $133,100, dividends per share is $1, tax rate is 35 percent, and number of shares of common stock outstanding is 84,000. LaTonya’s Flop Shops has no preferred stock outstanding. Calculate the times interest earned ratio for LaTonya’s Flop Shops, Inc.,

Answer 1

Answer:

Times Interest earned ratio is 4.41 times

Explanation:

Times interest earned ratio measure the business capability to pay the interest over its liabilities from its current earning.

As interest expense value is not given it is calculated by the net of Earning before interest and tax and Income before tax

Net Income = Addition to Retained Earning + Dividend Paid = $133,100 + ( 84,000 x $1 ) = $133,100 + $84,000 = $217,100

Income before tax = $217,100 x 100% / ( 100% - 35%) = $334,000

Earning before interest and tax = Sales - Cost of goods sold - depreciation expense - other operating expenses = 1,440,000 - 570,000 - 144,000 - 294,000 = $432,000

Interest Expense = Earning before interest and tax - Income before tax = $432,000 - 334,000 = $98,000

Times Interest earned ratio = Earning before Interest and tax /  Interest expense = $432,000 / $98000 = 4.41 time