The Fortune Company reported the following income for Year 2: $\begin{array}{l}
\begin{array}{|l}
\hline \
\hline \text { Sales } & \
\hline \text { Cost of goods sold } & \
\hline \text { Gross margin } \
\hline \text { Selling and administrative expense } \
\hline \text { Operating income } \
\hline \text { Interest expense } \
\hline \text { Income before taxes } \
\hline \text { Income tax expense } \
\hline \text { Net income } \
\hline \
\hline
\end{array}
\begin{array}{|r|}
\hline \
\hline \$ \quad130,000 \
\hline \underline { 80,000} \
\hline \$ \quad50,000 \
\hline \underline { 15,000} \
\hline \$ \quad35,000 \
\hline \underline { 5,000 } \
\hline \$ \quad30,000 \
\hline \underline { 10,000} \
\hline \underline { \$ \quad 20,000} \
\hline \
\hline
\end{array}
\end{array}$ What is the company's number of times interest is earned ratio?

Question

The Fortune Company reported the following income for Year 2: $\begin{array}{l}
\begin{array}{|l}
\hline \
\hline \text { Sales } & \
\hline \text { Cost of goods sold } & \
\hline \text { Gross margin }  \
\hline \text { Selling and administrative expense }  \
\hline \text { Operating income }  \
\hline \text { Interest expense }  \
\hline \text { Income before taxes }  \
\hline \text { Income tax expense } \
\hline \text { Net income } \
\hline \
\hline 
\end{array}
\begin{array}{|r|}
\hline \
\hline \$ \quad130,000 \
\hline \underline { 80,000} \
\hline \$ \quad50,000 \
\hline \underline { 15,000}  \
\hline \$ \quad35,000 \
\hline \underline { 5,000 } \
\hline \$ \quad30,000 \
\hline \underline { 10,000}  \
\hline \underline { \$ \quad 20,000}  \
\hline \
\hline 
\end{array}
\end{array}$ What is the company's number of times interest is earned ratio?

Quizplus · Accepted Answer

The number of times interest is earned ratio is calculated by dividing income before taxes by interest expense. In this case, income before taxes is $30,000 and interest expense is $5,000, so the number of times interest is earned ratio is $30,000 / $5,000 = 6 times.

The Fortune Company Reported the Following Income for Year 2