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	$360,000		$110,000
Current maturities of serial bonds payable	240,000		240,000
Serial bonds payable, 10%	1,020,000		1,260,000
Common stock, $1 par value	60,000		70,000
Paid-in capital in excess of par	590,000		600,000
Retained earnings	2,050,000		1,630,000

The income before income tax was $415,800 and $363,800 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 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.

Answer 1

Answer :-

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

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

For Current Year = $1,620,000 / $2,700,000 = 0.6

For Previous Year = $1,610,000 / $2,300,000 = 0.7

b. Times interest earned ratio = EBIT /Interest expense

EBIT = Income before income tax + Interest expense

Interest expense for Current Year = $240,000+$1,020,000*10% = $126,000

Interest expense for previous year = $240,000+$1,260,000*10% = $150,000

For Current Year = $415,800 + $126,000 / $126,000 = 4.3

For Previous Year = $363,800 + $150,000 / $150,000 = 3.42

C. The ratio of Liabilities to stockholders equity has "reduced" and the times interest earned ratio has "Improved" from the 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.

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