Question

In the current year, Pringle Company reported Sales of $ 1,420,000 , Interest Expense of $ 12,000 , Income Tax Expense of $ 13,000 , and Net Income of $ 52,000 . What is Pringle's times interest earned ratio?

Answer 1

In the current year, Pringle Company reported Sales of $ 1,420,000 , Interest Expense of $ 12,000 , Income Tax Expense of $ 13,000 , and Net Income of $ 52,000 .

If we are single and a wage earner with an annual salary of $45,000, your federal income tax liability will be approximately $4700. Social security and medicare tax will be approximately $3,400.

A higher times interest earned ratio is favorable because it means that the company presents less of a risk to investors and creditors in terms of solvency. From an investor or creditor's perspective an organization that has a times interest earned ratio greater than 2.5 is considered an acceptable risk.

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Answer 2

Times interest earned ratio = earnings before interest and taxes/interest expense

- Earnings before interest and taxes = Net income + interest expense + tax expense

Earnings before interest and taxes = 52,000 + 12,000 + 13,000 = $77,000

- interest expense = $12,000

Therefore, the Times interest earned ratio = earnings before interest and taxes/interest expense

Times interest earned ratio = 77,000 / 12,000

Times interest earned ratio = 6.42

The lower the interest coverage ratio, the more the business enterprise's debt and the opportunity of financial ruin. Intuitively, a decrease ratio suggests that much less running earnings are to be had to meet hobby bills and that the company is extra prone to unstable interest costs

Typically, a hobby insurance ratio of a minimum of two is taken into consideration as the minimum suitable quantity for an agency that has strong, constant sales. In contrast, an insurance ratio below one suggests a corporation cannot meet its cutting-edge hobby payment responsibilities and, therefore, isn't in top monetary fitness.

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