Hsu Company reported the following on its income statement: Interest expense was $80,000. Hsu Company's times interest earned is
A) 8 times
B) 6.25 times
C) 5.25 times
D) 5 times

Question

Hsu Company reported the following on its income statement:  Interest expense was $80,000.  Hsu Company's times interest earned is
A) 8 times 
B) 6.25 times 
C) 5.25 times 
D) 5 times

Quizplus · Accepted Answer

Times interest earned is a measure of a company's ability to meet its interest payments. It is calculated as earnings before interest and taxes (EBIT) divided by interest expense. 
Times interest earned = EBIT / Interest expense 
Since we are not given EBIT, we cannot calculate the exact times interest earned, but we can use the information provided to eliminate some answer choices. 
If Hsu Company's interest expense was $80,000 and its times interest earned was 8, then its EBIT would have to be $640,000 (8 x $80,000). However, we know nothing about Hsu Company's earnings, so this is unlikely to be the correct answer. 
If Hsu Company's interest expense was $80,000 and its times interest earned was 5, then its EBIT would have to be $400,000 (5 x $80,000). This is a possible scenario, and the times interest earned would be 5 times. 
If Hsu Company's interest expense was $80,000 and its times interest earned was 5.25, then its EBIT would have to be $420,000 (5.25 x $80,000). This is also a possible scenario, and the times interest earned would be 5.25 times. 
If Hsu Company's interest expense was $80,000 and its times interest earned was 6, then its EBIT would have to be $480,000 (6 x $80,000). This is a possible scenario, and the times interest earned would be 6 times. 
However, 6 is the highest number among the possible answers, so we can eliminate that choice. Therefore, the best choice is B) 5.25 times.

Hsu Company Reported the Following on Its Income Statement