Question

In the current year, Pendleton Company had income tax expense of $40,000 and net income of $200,000. If the times-interest-earned ratio for Pendleton was 13 during the current year, what was its interest expense

Answer 1

Answer: $20,000

Explanation:

The times-interest-earned ratio is used to know the ability of a firm to pay interest on a particular debt. It is calculated as the addition of the net income, the taxes and the interest expense, which is then divided by the interest.

Based on the information given, the interest expenses will be represented by y and solved further as:

= (200,000 + 40000 + y) / y = 13

= (240000 + y) / y = 13

Cross multiply

240000 + y = 13 × y

240000 + y = 13y

13y - y = 240000

12y = 240000

y = 240000/12

y = 200000

Therefore, the interest expense is $20,000

Here is the algebra. (1) [(240,000 + x) / x} = 13. (2) 240,000+ x = 13x. (3) 240,000 = 12x. (4) x = 20,000