The times-interest-earned ratios of Orlando Company are 20.56 and 7.35 for 2018 and 2019,respectively.Which of the following can be the possible reason for such a change from 2018 to 2019?
A) Orlando Company incurred less debt specifically in its revolving line of credit.
B) Orlando Company incurred more debt specifically in its revolving line of credit.
C) Orlando Company paid less interest in its revolving line of credit.
D) Orlando Company's debt-paying ability increased.

Question

Quizplus · Accepted Answer

The times-interest-earned ratio indicates the ability of a company to meet its interest payment obligations. A higher ratio indicates that the company is generating sufficient earnings to meet its interest payments. A lower ratio indicates that the company is facing difficulties in meeting its interest payments. In this case, the times-interest-earned ratio has decreased from 20.56 in 2018 to 7.35 in 2019. This implies that Orlando Company is now generating lower earnings to meet its interest payments. One possible reason for this change could be that the company incurred more debt specifically in its revolving line of credit.

The Times-Interest-Earned Ratios of Orlando Company Are 20