Question
In: Accounting
Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from...
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 | $552,000 | $162,000 | ||
| Current maturities of serial bonds payable | 370,000 | 370,000 | ||
| Serial bonds payable, 10% | 1,520,000 | 1,890,000 | ||
| Common stock, $1 par value | 80,000 | 100,000 | ||
| Paid-in capital in excess of par | 900,000 | 900,000 | ||
| Retained earnings | 3,090,000 | 2,460,000 | ||
The income before income tax was $529,200 and $463,100 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 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.
Solutions
Expert Solution
| current year | previous year | ||
| Total liabilities | 552000+370000+1520000=2442000 | 162000+370000+1890000=2422000 | |
| Total equity | 80000+900000+3090000=4070000 | 100000+900000+2460000=3460000 | |
| a)ratio of liabilities to stockholders' equity | Total liabilities /total equity |
2442000/4070000 .60 |
2422000/3460000 .70 |
| b)times interest earned ratio | (Income before tax+interest)/Interest |
[529200+189000/]/189000 3.8 |
[463100+226000]/226000 3 |
**serial bond outstanding at beginning of previous year= Outstanding at end (non current)
= (1890000+370000)
= 2260000
Interest = 2260000*10%= 226000
****Interest for current year = 1890000*10%=189000
c)The ratio of liabilities to stockholders' equity has improved 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.
ekkarill92 answered 1 year agoRelated Solutions
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