Question

Sales are $1.46 million, cost of goods sold is $580,000, depreciation expense is $146,000, other operating expenses is $296,000, addition to retained earnings is $115,600, dividends per share is $1, tax rate is 40 percent, and number of shares of common stock outstanding is 86,000. LaTonya’s Flop Shops has no preferred stock outstanding. Use the above information to calculate the times interest earned ratio for LaTonya’s Flop Shops, Inc.

Answer 1

Answer:

4.29

Explanation:

The times interest earned ratio can be determined through following mentioned equation

Times interest earned ratio=Earnings before interest and tax/Interest expense

Earning before interest and tax shall be calculated as follow:

Earning before interest and tax=Sales-cost of goods sold-depreciation expense-other operating expenses

                                                    =$1,460,000-$580,000-146,000-$296,000

                                                    =$438,000

The interest expense shall be determined through following mentioned formulas:

Interest expense= Earning before interest and tax-Earning before tax

Earning before tax=Net income/0.60

Net income=Additions to retained earnings+dividend paid

Net income=$115,600+($1*86,000)

Net income=$201,600

Earning before tax=201,600/0.60=$336,000

Interest expense=$438,000-$336,000=$102,000

Times interest earned ratio=438,000/102,000=4.29