Question

Auto Industries Company reported the following on its income statement:

Income before income taxes $420,000
Income tax expense (120,000)
Net income $300,000
If the income statement also shows interest expense equal to $80,000, what is the company's times interest earned ratio?
a. 5 times.
b. 6.25 times.
c. 5.25 times.
d. 8 times.

Answer 1

Option c. 5.25 times is the correct answer.

Step-by-step explanation:

Below is the calculation:

Income before income tax = $420000

Income tax expenses = 120000 dollars

Net income = $300000

Interest expense = $80000

Interest earned ratio = Earning Before Interest and Taxes / Interest Expenses

Interest earned ratio = 420000 / 80000

Interest earned ratio = 5.25 times

Option c. 5.25 times is the correct answer.