2014 2013
Interest expense $5,000,000 $5,000,000
Income before income tax 3,500,000 6,000,000
a. Determine the number of times interest charges are earned for 2014 and 2013. Round to one decimal place.
b. What conclusions can you draw?
Answer:
a. Number of times interest charges earned:
$3,500,000 + $5,000,000 2014: = 1.7 $5,000,000
$6,000,000 + $5,000,000 2013: = 2.2 $5,000,000
b. The number of times interest charges are earned has decreased from 2.2 in 2013 to 1.7 in 2014. Although the company has enough earnings to pay interest in 2014, the deterioration in this ratio is a cause for concern to debtholders.