Question

Given the following information, what is the times interest earned ratio?

Fixed assets (net) at year-end $400,000
Average fixed assets 450,000
Total assets 500,000
Long-term liabilities 300,000
Total liabilities 350,000
Total stockholders' equity 250,000
Total liabilities and stockholders' equity 500,000
Interest expense 5,000
Income before income tax 150,000
Net income 100,000

a. 31
b. 20
c. 21
d. 30

Answer 1

The times interest earned ratio (TIE) is calculated by dividing income before income tax ($150,000) by the interest expense ($5,000), which yields a TIE ratio of 30. This indicates the company can cover its interest expenses 30 times over with its income before taxes.

So, the correct answer is option D. 30.

Step-by-step explanation:

To calculate the times interest earned ratio (TIE), you need to divide the income before income tax by the interest expense. The TIE ratio is a financial metric that measures a company's ability to meet its debt obligations based on its current income.

The formula for the times interest earned ratio is:

Times Interest Earned Ratio = Income Before Income Tax / Interest Expense

Using the given information:

Income before income tax = $150,000

Interest expense = $5,000

Now, plug these figures into the formula:

Times Interest Earned Ratio = $150,000 / $5,000 = 30

Therefore, the TIE ratio is 30, which means that the company can cover its interest expense 30 times with its current income before income taxes.

So, the times interest earned ratio is 30, which matches option d.