Question

Alvarez Company had the following results:

Long-term debt (average rate of interest is 8%)	$400,000
Interest expense	42,000
Net income	58,000
Income tax	35,000
Depreciation and amortization expense	20,000
Operating income	126,000

What is the Times Interest Earned ratio?

	a.	3.7
	b.	3.0
	c.	3.2
	d.	9.5
	e.	1.4

Answer 1

Long-term debt = $400,000

Interest expense = $42,000

Net income = $58,000

Income tax = $35,000

Depreciation and amortization expense = 20,000

Operating income = 126,000

Times Interest Earned ratio = (Net income + Income tax + Interest expense)/Interest expense

= (58,000 + 35,000 + 42,000)/42,000

= 135,000/42,000

= 3.2

Correct option is (C)

Note :- Other information given in the question are not relevant to calculate Times Interest Earned ratio, hence ignored.

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