Question

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.

Answer 1

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