The income before taxes and interest expense of Barry Builders for the year just ended is $230,000.Their interest expense is $20,000 and their income taxes are $80,500.The number of times interest would be earned is:
A)22.0.
B)10.5.
C)11.5.
D)0.5.

Question

Quizplus · Accepted Answer

First, we need to calculate the earnings before interest and taxes (EBIT):
EBIT = Income before taxes + Interest expense
EBIT = $230,000 + $20,000
EBIT = $250,000

Next, we can use the formula for times interest earned (TIE) to calculate how many times the company could cover its interest expense with its EBIT:

TIE = EBIT / Interest expense
TIE = $250,000 / $20,000
TIE = 12.5

Therefore, the company could cover its interest expense 12.5 times with its EBIT. However, we need to adjust for income taxes:

Adjusted TIE = (EBIT + Income taxes) / Interest expense
Adjusted TIE = ($250,000 + $80,500) / $20,000
Adjusted TIE = 16.025

Since we cannot have partial times, we round down to the nearest whole number to get:

Adjusted TIE = 16

Therefore, the company could cover its interest expense 16 times with its EBIT after adjusting for income taxes.

The Income Before Taxes and Interest Expense of Barry Builders