Question

Putnam Company's 2014 financial statements contain the following selected data: Income taxes $40,000, Interest expense $15,000, Net income $60,000. What is Putnam's times interest earned for 2014?

1) 4.0 times
2) 7.7 times
3) 5.0 times
4) 6.7 times

Answer 1

Putnam Company's times interest earned for 2014 is calculated as 5, indicating that the company can cover its interest expense 5 times over with its earnings.

Step-by-step explanation:

The question asks for the calculation of Putnam Company's times interest earned for the year 2014, which is a measure of the company's ability to meet its interest obligations. To calculate this, we add the net income and interest expense, and then divide by the interest expense. Utilizing the given selected data: net income is $60,000 and interest expense is $15,000. First, we add the net income and interest expense together, which equals $75,000 ($60,000 + $15,000). Then, we divide this sum by the interest expense to get the times interest earned:

Times Interest Earned = (Net Income + Interest Expense) / Interest Expense

Times Interest Earned = ($60,000 + $15,000) / $15,000

Times Interest Earned = $75,000 / $15,000

Times Interest Earned = 5

This result shows that Putnam's times interest earned ratio for 2014 is 5. The company can pay its interest expense 5 times over with its earnings before interest and taxes.