2014 2013
Interest expense $ 320,000 $ 300,000
Income before income tax expense 3,200,000 3,600,000
a. Determine the number of times interest charges are earned for 2014 and 2013. Round to one decimal place.
b. Is the number of times interest charges are earned improving or declining?
Answer:
a. Number of times interest charges earned:
2014:
2013:
$3,200,000 + $320,000
$320,000
$3,600,000 + $300,000
$300,000
= 11.0
= 13.0
b. The number of times interest charges are earned has decreased from 13.0 in 2013
to 11.0 in 2014. Although the company has adequate earnings to pay interest, the
decline in this ratio may cause concern among debtholders.