Question

The following financial information was obtained from the year ended 2018 income statements for Kringle Automotive and Leihman Automotive (Click the icon to view the financial information.)
Requirements 1. Compute the times-interest-earned ratio for each company. Round to two decimals
2. Which company was better able to cover its interest expense?
Requirement 1. Compute the times-interest-earned ratio for each company. Round to two decimals. Begin by showing the formula for the times-interest-earned ratio. Times-interest-earned ratio Now calculate the times-interest-earned ratio for each company. (Round the ratios to two decimal places, X.XX.) - X Data Table Leihman Kringle Times-interest-eamed ratio Kringle Leihman
Requirement 2. Which company was better able to cover its interest expense? 46.320 S Net income 40.870 S Automotive was better able cover its interest expense. 10,300 12,080 Income tax expense 350 2,000 Interest expense

Answer 1

Answer:

times interest ratio = EBIT / interest expense

1)

Kringle: TIE ratio = ($40,870 - $10,300 - $350) / $350 = 86.34

Leihman: TIE ratio = ($46,320 - $12,080 - $2,000) / $2,000 = 16.12

2)

Kringle was better able to cover its interest expenses since its TIE ratio is much higher than Leihman's (more than 5 times higher). This means that it is much easier for Kringle to pay off the interests on its debt.