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Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...

Ratio of Liabilities to Stockholders' Equity and Times Interest Earned

The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years:

Current
YearPrevious
Year

Accounts payable$622,000 $168,000

Current maturities of serial bonds payable380,000 380,000

Serial bonds payable, 10%1,560,000 1,940,000

Common stock, $1 par value70,000 90,000

Paid-in capital in excess of par810,000 810,000

Retained earnings2,780,000 2,210,000

The income before income tax expense was $814,800 and $713,000 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   and the number of times bond interest charges were earned has   from the previous year. These results are the combined result of a   income before income taxes and   interest expense in the current year compared to the previous year.

Solutions

Expert Solution

a

Ratio of liabilities to stockholders' equity = Total liabilities / Total stockholders' equity

Total liabilities = Accounts payable + Current maturities of serial bonds payable + Serial bonds payable,10%

Total stockholders' equity = Common stock + Paid in capital in excess of par + Retained earnings

Current year = $622,000+380,000+1,560,000 / $70,000+810,000+2,780,000

Current year = $2,562,000 / 3,660,000 = 0.7

Previous year = $168,000+380,000+1,940,000 / $90,000+810,000+2,210,000

Previous year = $2,488,000 / 3,110,000 = 0.8

b

Times interest earned ratio = Income before income tax + Interest expense / Interest expense

Current year = $814,800+[(1,560,000+380,000)*10%] / [(1,560,000+380,000)*10%]

Current year = $814,800+194,000 / 194,000 = 5.2

Previous year = $713,000+[(1,940,000+380,000)*10%] / [(1,940,000+380,000)*10%]

Previous year = $713,000+232,000 / 232,000 = 4.1

c.

The ratio of liabilities to stockholders equity has decreased and the number of times bonds interest charges were earned has increased from previous year. These results are the combined result of a higher income before income taxes and lower interest expense in the current year compared to the previous year.

ekkarill92 answered 2 years ago
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