Last year Neil Company had a net income of $170,000, income tax expense of $37,000, and interest expense of $24,000. The company's times-interest-earned ratio was closest to
A) 8.63.
B) 7.08.
C) 9.63.
D) 6.24.

Question

Quizplus · Accepted Answer

The times-interest-earned ratio is calculated by dividing earnings before interest and taxes (EBIT) by interest expense. To find EBIT, we would add interest expense and income tax expense to net income:

EBIT = Net Income + Interest Expense + Income Tax Expense 
EBIT = $170,000 + $24,000 + $37,000 
EBIT = $231,000

Now we can calculate the times-interest-earned ratio:

Times-Interest-Earned Ratio = EBIT / Interest Expense 
Times-Interest-Earned Ratio = $231,000 / $24,000 
Times-Interest-Earned Ratio = 9.625

The closest choice is C: 9.63.

Last Year Neil Company Had a Net Income of $170,000