Question
In: Accounting
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 Year | Previous Year | |||
| Accounts payable | $744,000 | $198,000 | ||
| Current maturities of serial bonds payable | 460,000 | 460,000 | ||
| Serial bonds payable, 10% | 1,890,000 | 2,350,000 | ||
| Common stock, $1 par value | 90,000 | 110,000 | ||
| Paid-in capital in excess of par | 970,000 | 980,000 | ||
| Retained earnings | 3,360,000 | 2,670,000 | ||
The income before income tax was $564,000 and $493,500 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 times interest earned ratio 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)
| Current year | previous year | |
| Accounts payable | $744000 | $198000 |
| Current maturities of serial bonds payable | $460000 | $460000 |
| Serial bonds payable, 10% | $1890000 | $2350000 |
| Total liability(A) | $3094000 | $3008000 |
| Common stock, $10 par value | $90000 | $110000 |
| Paid in capital in excess of par | $970000 | $980000 |
| Retained earning | $3360000 | $2670000 |
| Shareholder's equity (B) | $4420000 | $3760000 |
| Liabilities to share holder's equity (A)/(B) | 0.7 | 0.8 |
B)
| Current year | previous year | |
| Income before tax | $564000 | $493500 |
| Interest (C) | $235000[(460000+1890000)×10%] | $281000[(460000+2350000)×10%] |
| Income before tax and interest(D) | $799000 | $774500 |
| No of times the bond interest charge is earned (D)/( C) | 3.4 | 2.8 |
C)
It is true. Liabilities to equity has improved beacuse of reduction of liabilities in terms of serial bond. Further time interest earned has improved beacuse of increase in income before income tax and reduction in interest liabilities as a result of reduction in debt.
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ekkarill92 answered 1 year agoRelated Solutions
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