The Fortune Company reported the following income for Year 2: $\begin{array}{lr}
\text {Sales}&\$135,000\
\text {Cost of goods sold}&\underline{82,500}\
\text {Gross margin}&\$52,500\
\text {Selling and administrative expense}&\underline{20,000}\
\text { Operating income } & \$ 32,500 \
\text { Interest expense } & \underline{5,500} \
\text {Income before taxes } & \$ 27,000 \
\text { Income tax expense } & \underline{ 8,100} \
\text { Net income } & \underline{\$ 18,900}
\end{array}$ What is the company's number of times interest is earned ratio?
A) 3.4 times
B) 4.9 times
C) 5.9 times
D) None of these answers are correct.

Question

The Fortune Company reported the following income for Year 2: $\begin{array}{lr}
\text {Sales}&\$135,000\
\text {Cost of goods sold}&\underline{82,500}\
\text {Gross margin}&\$52,500\
\text {Selling and administrative expense}&\underline{20,000}\
\text { Operating income } & \$ 32,500 \
\text { Interest expense } &  \underline{5,500} \
 \text {Income before taxes } & \$ 27,000 \
\text { Income tax expense } & \underline{ 8,100} \
\text { Net income } &  \underline{\$ 18,900}
\end{array}$  What is the company's number of times interest is earned ratio?
A) 3.4 times
B) 4.9 times
C) 5.9 times
D) None of these answers are correct.

Quizplus · Accepted Answer

The number of times interest is earned ratio is calculated as Operating Income divided by Interest Expense. Here, it is $32,500 / $5,500 = 5.9 times.

The Fortune Company Reported the Following Income for Year 2