Question

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	$510,000		$130,000
Current maturities of serial bonds payable	320,000		320,000
Serial bonds payable, 10%	1,270,000		1,590,000
Common stock, $1 par value	60,000		80,000
Paid-in capital in excess of par	660,000		660,000
Retained earnings	2,280,000		1,810,000

The income before income tax was $588,300 and $514,800 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 (improved or deteriorated) and the times interest earned ratio has (improved or deteriorated) from the previous year. These results are the combined result of a (larger or smaller) income before income taxes and (larger or lower) interest expense in the current year compared to the previous year.

Answer 1

Computation of Ratio of Liabilities to Stockholder Equity
	Current Year	Last Year
Total Liabilities
Accoutn Payable	$510,000	$130,000
Current Maturities of Serial Bond Payable	$320,000	$320,000
Serial Bond Payable	$1,270,000	$1,590,000
Total Liabilities	$2,100,000	$2,040,000
Stockholder Equity
Common Stock	$60,000	$80,000
Paid in Capitla in Excess of par	$660,000	$660,000
Retained Earning	$2,280,000	$1,810,000
Total Stockholder Equity	$3,000,000	$2,550,000
Ratio of Liabilities to Stockholder Equity (a/b)	0.7	0.8
Computation of Times Interest Earned Ratio
	Current Year	Last Year
Earning Before Interest and Tax
Income Before Tax	$588,300	$514,800
Interest	$159,000	$191,000
	(1270000+320000)*10%	(1590000+320000)*10%
Earning Before Interest and Tax	$747,300	$705,800
Times Interest Earned Ratio (EBIT/ Interest)	4.7	3.70
The ratio of liabilities to stockholders' equity has (improved) and the times interest earned ratio has (improved) from the previous year. These results are the combined result of a (larger)income before income taxes and ( lower) interest expense in the current year compared to the previous year.