Question

In: Accounting

Berry Company reported the following on the company's income statement in two recent years

Berry Company reported the following on the company's income statement in two recent years

ParticularsCurrent YearPrior Year
Interest expense$320,000$300,000
Income before income tax expense3,200,0003,600,000

(a)Determine the times interest earned ratio for the current year and the prior year.Round to one decimal place

(b) Is the number of times interest charges are earned improving or declining

Solutions

Expert Solution

Times Interest Earned ratio : It is the ratio that measures a company's capacity to cover interest costs. It is computed as displayed below.

Times Interest earned ratio = Income before income tax 

Calculation of interest earned ratio for current year,if income before income tax is given as $3,200,000 and interest expense is given as  $320,000

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

=$3,200,000 + $320,000 / $320,000

=11.0

Calculation of interest earned ratio for prior year,if income before income tax is given as $3,600,000 and interest expense is given as $300,000

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

=$3,600,000 + $300,000 / $300,000

=13.0

 

(a)As a result, the current year's and preceding year's times interest earned ratios are 11.0 and 13.0, respectively.

(b)The current year's times interest earned ratio of 11.0 is lower than the previous year's ratio of 13.0. This may cause debtholders to lose faith in the company's capacity to make interest payments.

balaji rao answered 2 years ago
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