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	$918,000		$217,000
Current maturities of serial bonds payable	540,000		540,000
Serial bonds payable, 10%	2,150,000		2,690,000
Common stock, $1 par value	90,000		110,000
Paid-in capital in excess of par	990,000		1,000,000
Retained earnings	3,430,000		2,720,000

The income before income tax expense was $941,500 and $823,800 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................ 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.

Answer 1

All amounts are in $

(a)

Liabilities to Equity ratio = Liabilities/Equity

Liabilities = Accounts payable + Current maturities of bond payable + Bond payable

For Current year = 918,000 + 540,000 + 2,150,000 = 3,608,000

For Previous year = 217,000 + 540,000 + 2,690,000 = 3,447,000

Equity = Common stock + Paid in capital + Retained earnings

For Current year = 90,000 + 990,000 + 3,430,000 = 4,510,000

For Previous year = 110,000 + 1,000,000 + 2,720,000 = 3,830,000

Liabilities to stockholders equity ratio

For Current year = 3,608,000/4,510,000 = 80%

For Previous year = 3,447,000/3,830,000 = 90%

(b)

Times Interest earned = Earnings before Interest and Taxes/ Total Interest

Total interest in Current year = (2,150,000+540,000) x 10% =269,000

Total interest in previous year = (2,690,000+540,000) x 10% = 323,000

Here taken that the current payables of serial bonds are paid at the beginning of next year

EBIT = EBT + Interest

For Current year = 941,500 + 269,000 = 1,210,500

For Previous year = 823,80 + 323,000 = 1,146,800

Times interest earned :

For Current year = 1,210,500/269,000 = 4.5 times

For Previous year = 1,146,800/323,000 = 3.55 times

(c)

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