The Fortune Company reported the following income for Year 2: $\begin{array}{lrr}
\text { Sales } & \$ 130,000 \
\text { Cost of goods sold } & \underline{80,000} \
\text { Gross margin } & 50,000 \
\text { Selling and administrative expense } & \underline{ 15,000} \
\text { Operating income } & \$ 35,000 \
\text { Interest expense } & \underline{ 5,000} \
\text { Income before taxes } & \$ 30,000 \
\text { Income tax expense } & \underline{10,000}\
\text { Net income } & \underline{\$ 20,000}
\end{array}$ What is the company's number of times interest is earned ratio?
A) 7 times
B) 6 times
C) 4 times
D) None of these answers are correct.

Question

The Fortune Company reported the following income for Year 2: $\begin{array}{lrr}
\text { Sales } & \$ 130,000 \
\text { Cost of goods sold } & \underline{80,000} \
\text { Gross margin } & 50,000 \
\text { Selling and administrative expense } & \underline{ 15,000} \
\text { Operating income } & \$ 35,000 \
\text { Interest expense } & \underline{ 5,000} \
\text { Income before taxes } & \$  30,000 \
\text { Income tax expense } &  \underline{10,000}\
\text { Net income } &  \underline{\$ 20,000}
\end{array}$ What is the company's number of times interest is earned ratio?
A) 7 times
B) 6 times
C) 4 times
D) None of these answers are correct.

Quizplus · Accepted Answer

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