Question

Ratio of Liabilities to Stockholders' Equity and Number of 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	$464,000		$286,000
Current maturities of serial bonds payable	470,000		470,000
Serial bonds payable, 10%	2,230,000		2,700,000
Common stock, $1 par value	90,000		110,000
Paid-in capital in excess of par	990,000		1,000,000
Retained earnings	3,440,000		2,730,000

The income before income tax was $756,000 and $661,500 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 improved  and the number of times bond interest charges were earned has improved  from the previous year. These results are the combined result of a larger  income before income taxes and lower

Correct

interest expense in the current year compared to the previous year.

Answer 1

Liabilities to stockholders equity ratio =	Total liabilties/ Total Shareholder equity
	Current year		Previous year
Liabilities to stockholders equity ratio	2.2		0.8
Working note 1 :
	Current year		Previous year
Accounts payable	4,64,000		$286,000
Current maturities of serial bonds payable	4,70,000		470000
Serial bonds payable, 10%	22,30,000		2700000
Total liabilities	31,64,000		31,70,000
Common stock, $1 par value	90000		110000
Paid-in capital in excess of par	990000		1000000
Retained earnings	344000		2730000
Total shareholders equity	14,24,000.00		38,40,000.00

Times Interest earned ratio (TIE)
It is a measure of a company's ability to meet its debt obligations based on its current income (Earning before Interest and tax)
TIE =Earning before Interest and taxes/ Total interest payable Particulars Current year   Previous year Earning before tax        7,56,000        6,61,500 Add: Interest on serial bond 317000 321700 Earning before Interest and tax      10,73,000        9,83,200 Current year   Previous year TIE                   3.4                   3.1 Note : TIE ratio is based on assumption that Earning before tax has not taken into consideration Interest payable on bonds . Hence same has been added to arrive at Earning before Interest and tax ( EBIT) If we assume that Income before tax is our EBIT then TIE ratio would be as below : Current year   Previous year TIE 2.4 2.1 Working note 2: Interest on serial bonds Current year   Previous year Opening balance of bond liability* 31,70,000 32,17,000 Interest @ 10% 317000 321700 * Current maturities of serial bonds payable +Serial bonds payable, 10%