Question

Use the following information from separate companies a through d: Net Income (Loss) Interest Expense Income Taxes a. $ 136,000 $ 55,760 $ 34,000 b. 130,600 50,934 47,016 c. 115,600 45,084 48,552 d. 139,100 6,955 66,768 Compute times interest earned. Which company indicates the strongest ability to pay interest expense as it comes due?

Answer 1

Company a. 4.05

Company b. 4.49

Company c. 4.64

Company d. 30.60

From the above, Company d. has the strongest ability to pay interest expense as it comes due with 30 times.

Step-by-step explanation:

Times interest earned = Income before interest and tax ÷ Interest expenses

Company a. Times interest earned = ($136,000 + $55,760 + $34,000) ÷ $55,760 = 4.05 times

Company b. Times interest earned = ($130,600 + $50,934 + $47,016) ÷ $50,934 = 4.49 times

Company c. Times interest earned = ($115,600 + $45,084 + $48,552) ÷ $45,084 = 4.64 times

Company d. Times interest earned = ($139,100 + $6,955 + $66,768) ÷ $6,955 = 30.60 times

From the above, Company d. has the strongest ability to pay interest expense as it comes due with 30 times.