Auto Industries Company reported the following on its income statement:
$\begin{array}{lr}
\text { Income before income taxes } & \$ 420,000 \
\text { Income tax expense } & \$ 120,000 \
\text { Net income } & \$ 300,000
\end{array}$ If the income statement also shows interest expense equal to $80,000,what is the company's times interest earned ratio?

Question

Auto Industries Company reported the following on its income statement:  
$\begin{array}{lr}
\text { Income before income taxes } & \$ 420,000 \
\text { Income tax expense } & \$ 120,000 \
\text { Net income } & \$ 300,000
\end{array}$ If the income statement also shows interest expense equal to $80,000,what is the company's times interest earned ratio?

Quizplus · Accepted Answer

The times interest earned ratio is calculated as (Income before income taxes + Interest expense) / Interest expense. Here, it's ($420,000 + $80,000) / $80,000 = $500,000 / $80,000 = 6.25 times.

Auto Industries Company Reported the Following on Its Income Statement