Question

# Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...

1. 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 \$626,000 \$310,000 Current maturities of serial bonds payable 550,000 550,000 Serial bonds payable, 10% 2,520,000 3,070,000 Common stock, \$1 par value 90,000 120,000 Paid-in capital in excess of par 1,020,000 1,020,000 Retained earnings 3,510,000 2,790,000

The income before income tax was \$1,013,100 and \$886,500 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 ________ and the times interest earned ratio has _______ from the previous year. These results are the combined result of a   income before income taxes and _______ interest expense in the current year compared to the previous year.

(a) ratio of liabilities to stockholders' equity = Total liabilities / Total Shareholder's Equity

Current year = \$ 626000 + \$ 550000+ \$ 2520000/ \$ 90000+ \$ 1020000+ \$ 3510000

= \$ 3696000/ \$ 4620000

= 0.8

Previous year = \$ 310000+ \$ 550000 + \$ 3070000/ \$ 120000+ \$ 1020000+ \$ 2790000

= \$ 3930000/ \$ 3930000 = 1

(b) times interest earned ratio = Earning before interest and tax / Interset expenses

Current year = \$ 1013100 + \$ 2520000*10% / \$ 2520000*10%

= 5

Previous year = \$ 886500 + \$ 3070000*10% /\$ 3070000*10%

= 3.9

(c)

The ratio of liabilities to stockholders' equity has reduced and the times interest earned ratio has Increased from the previous year. These results are the combined result of a higher income before income taxes and Lower interest expense in the current year compared to the previous year.

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