Ratio of Liabilities to Stockholders' Equity and Times Interest Earned
The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years:
Current Year | Previous Year | |||
Accounts payable | $522,000 | $140,000 | ||
Current maturities of serial bonds payable | 320,000 | 320,000 | ||
Serial bonds payable, 10% | 1,300,000 | 1,620,000 | ||
Common stock, $1 par value | 60,000 | 70,000 | ||
Paid-in capital in excess of par | 670,000 | 680,000 | ||
Retained earnings | 2,330,000 | 1,850,000 |
The income before income tax was $469,800 and $411,100 for the current and previous years, respectively.
a. Determine the ratio of liabilities to stockholders' equity at the end of each year. Round to one decimal place.
Current year | |
Previous year |
b. Determine the times interest earned ratio for both years. Round to one decimal place.
Current year | |
Previous year |
c. The ratio of liabilities to stockholders' equity has improved and the times interest earned ratio has improved from the previous year. These results are the combined result of a larger income before income taxes and lower interest expense in the current year compared to the previous year.
1 | Ratio of Liabilities to Stockholders’ Equity = Total Liabilities / Total Stockholders' Equity | |||||
Current Year | ||||||
$(522,000 + 320,000 + 1,300,000) / (60,000 + 670,000 + 2,3300,000) | ||||||
'=$2,142,000/$3,060,000 = 0.70 | ||||||
Previous Year | ||||||
= $(140,000+320,000+1,620,000)/(70,000+680,000+1,850,000) | ||||||
= $2,080,000/$2,600,000 = 0.80 | ||||||
2 | Times Interest Earned Ration = (Total bond Payable * interest rate | |||||
= (Current maturity of bond payable+ Seriable Vond Payable)*intt rate | ||||||
Current Year | ||||||
= $(320,000+1,300,000)*10% = $162,000 | ||||||
Previous Year | ||||||
= $(320,000+1,620,000)*10% = $194,000 |
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