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	$628,000		$193,000
Current maturities of serial bonds payable	410,000		410,000
Serial bonds payable, 10%	1,710,000		2,120,000
Common stock, $1 par value	90,000		120,000
Paid-in capital in excess of par	1,010,000		1,010,000
Retained earnings	3,480,000		2,760,000

The income before income tax was $572,400 and $500,900 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

a
Current year	0.6
Previous year	0.7
b
Current year	3.7
Previous year	3.0

Workings:
	Current year	Previous year
Accounts payable	628000	193000
Current maturities of serial bonds payable	410000	410000
Serial bonds payable, 10%	1710000	2120000
Total liabilities	2748000	2723000
	Current year	Previous year
Common stock, $1 par value	90000	120000
Paid-in capital in excess of par	1010000	1010000
Retained earnings	3480000	2760000
Total stockholders' equity	4580000	3890000
	Current year	Previous year
Total liabilities	2748000	2723000
Divide by Total stockholders' equity	4580000	3890000
Ratio of liabilities to stockholders' equity	0.6	0.7
	Current year	Previous year
Income before income tax	572400	500900
Add: Interest expense	212000	253000
Income before interest and income tax	784400	753900
Divide by Interest expense	212000	253000
Times interest earned ratio	3.7	3.0