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	$95,000		$144,000
Current maturities of serial bonds payable	200,000		200,000
Serial bonds payable, 10%	1,010,000		1,210,000
Common stock, $1 par value	60,000		60,000
Paid-in capital in excess of par	570,000		580,000
Retained earnings	1,980,000		1,580,000

The income before income tax was $447,700 and $391,700 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

Answer 1

Total Liabilities = Accounts payable + Current Maturities of serial bonds payable + Serial Bonds payable

Total shareholder Equity = Common stock + Paid in capital in excess of par + Retained earnings

a. Ratio of liabilities to shareholders equity

= Liabilities / Shareholders equity

Current year = ($95,000 + $200,000 + $1,010,000) / ($60,000 + $570,000 + $1,980,000)

= $1,305,000 / $2,610,000

= 50%

Previous year = ($144,000 + 200,000 + $1,210,000) / ($60,000 + $580,000 + $1,580,000)

= $1,554,000 / $2,220,000

= 70%

b. Determine the times interest earned ratio

Interest expense = (Current maturities of serial bonds payable + Serial bonds payable) *10%

Current year

Interest expense = ($200,000 + $1,010,000) * 10%

= $121,000

Times interest earned ratio = (Interest expense + Income before tax) / Interest expense

= ($121,000 + $447,700) /$121,000

= 4.7

Previous year

Interest expense = ($200,000 + $1,210,000) *10%

= $141,000

Times interest earned ratio = ($141,000 + $391,700) / $141,000

= 3.8