Question

Ratio of Liabilities to Stockholders' Equity and 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	$260,000		$224,000
Current maturities of serial bonds payable	340,000		340,000
Serial bonds payable, 10%	1,680,000		2,020,000
Common stock, $1 par value	70,000		100,000
Paid-in capital in excess of par	840,000		840,000
Retained earnings	2,890,000		2,290,000

The income before income tax was $666,600 and $583,300 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

	Current year		Previous Year
	Liabilities	Stock holder's equity	Liabilities	Stock holder's equity
Accounts payable	$260,000		$260,000
Current maturities of serial bonds payable	$340,000		$340,000
Serial bonds payable, 10%	$1,680,000		$2,020,000
Common stock, $1 par value		$70,000		$100,000
Paid-in capital in excess of par		$840,000		$840,000
Retained earnings		$2,890,000		$2,290,000
Income before income tax		$666,600		$583,300
Total	$2,280,000	$4,466,600	$2,620,000	$3,813,300
a. ratio of liabilities to stockholders' equity at the end of each year
= $ 2,280,000/ $ 4,466,600	(Current year)
0.510
= $ 2,620,000 / $3,813,300	(Previous year)
0.687
b. the times interest earned ratio for both years
= Earnings before interest and tax / interest	(Current year)
= $ 834,600 / $168,000
4.968
= $785,300 / $202,000	(Previous year)
3.888
Income before income tax	$666,600	$583,300
Interest expense	$168,000	$202,000
Earnings before interest and tax	$834,600	$785,300