Question

Ratio of Liabilities to Stockholders' Equity and Number of 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	$982,000		$229,000
Current maturities of serial bonds payable	580,000		580,000
Serial bonds payable, 10%	2,310,000		2,890,000
Common stock, $1 par value	100,000		120,000
Paid-in capital in excess of par	1,060,000		1,070,000
Retained earnings	3,680,000		2,920,000

The income before income tax was $809,200 and $708,100 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 improved  and the number of times bond interest charges were earned has improved  from the previous year. These results are the combined result of a larger  income before income taxes and lower  interest expense in the current year compared to the previous year.

Answer 1

we will prepare total liabilities and stock holder's equity statement

	Current Year		Previous Year
Accounts payable	$982,000		$229,000
Current maturities of serial bonds payable	580,000		580,000
Serial bonds payable, 10%	2,310,000		2,890,000
Total liabilities	$3,872,000[982000+580000+2310000]		$3,699,000[229000+580000+2890000]
Common stock, $1 par value	100,000		120,000
Paid-in capital in excess of par	1,060,000		1,070,000
Retained earnings	3,680,000		2,920,000
Total shareholder's equity	$4,840,000[100000+1060000+3680000]		$4,110,000[120000+1070000+2920000]

ratio of liabilities to stockholders' equity is the ratio of total debt to shareholder's equity.it measure the financial leverage of the company.

=Total liabilities/total shareholder's equity

current year

=$3,872,000/$4,840,000

=0.8

previous year

=$3,699,000/$4,110,000

=0.9

2] times interest earned ratio = net income before interest and taxes / interest expense

here interest expense will be on Current maturities of serial bonds payable + Serial bonds payable, 10%

net income before interest and income tax = net income before tax+interest expense

	current year	previous year
interest expense	$289,000[2,310,000+580,000]*10%	$347,000[2890000+580000]*10%
income before income tax	$809,200	$708,100
income before interest and income tax	$1,098,200[289000+809200]	$1,055,100[347000+708100]
times interest earned ratio	3.8[1,098,200/289,000]	3.0[1,055,100/347000]

times interest earned ratio shows how much profitability company have to pay off its financial expenses.

higher the ratio better is the company's ability to honor its debt expenses.

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