Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below: Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2015. Assume that preferred dividends for the current year have not been declared.
-The number of times interest was earned during 2015 was
A) 700 ÷ 125.
B) 1,000 ÷ 125.
C) 1,124 ÷ 125.
D) 874 ÷ 125.

Question

Use the following information for questions 60 through 63.
Information for Ramirez Corp. is given below:  Additional information:
There are no preferred dividends in arrears, the balances in the Accounts Receivable and Inventory accounts are unchanged from January 1, 2015, and there were no changes in the Bonds Payable, Preferred Stock, or Common Stock accounts during 2015. Assume that preferred dividends for the current year have not been declared.
-The number of times interest was earned during 2015 was
A) 700 ÷ 125. 
B) 1,000 ÷ 125. 
C) 1,124 ÷ 125. 
D) 874 ÷ 125.

Quizplus · Accepted Answer

To calculate the number of times interest was earned, we need to use the formula:
Interest coverage ratio = (Net income + Interest expense + Income tax expense) ÷ Interest expense

From the given information, we are not provided with the values for net income, income tax expense, or interest expense, however, we are given the value of Earnings Before Interest and Taxes (EBIT) which is $1,124. Therefore, we can use this value to calculate interest coverage ratio as follows:

Interest coverage ratio = ($1,124 + $0 + $0) ÷ $125
Interest coverage ratio = $1,124 ÷ $125
Interest coverage ratio = 8.99 times or rounded to 9 times.

Therefore, the number of times interest was earned during 2015 was 9, and the best choice is C.

Use the Following Information for Questions 60 Through 63