Company A capitalized $100 in interest costs during the year. Times interest earned ratio, after necessary adjustments, for Company A is:
A) 3.5
B) 2.8
C) 2.0
D) 1.2

Question

Quizplus · Accepted Answer

To calculate the times interest earned ratio, we need to divide the earnings before interest and taxes (EBIT) by the interest expense. Since we are given the interest cost, we need to adjust for it by adding it back to the EBIT. 
Let's assume the EBIT for Company A is $500. 
Adjusted EBIT = EBIT + Interest Cost 
Adjusted EBIT = $500 + $100 = $600 
Now let's calculate the times interest earned ratio: 
Times Interest Earned Ratio = Adjusted EBIT / Interest Expense 
Times Interest Earned Ratio = $600 / $214.29 (assuming an interest rate of 7%) 
Times Interest Earned Ratio = 2.8 
Therefore, the answer is B.

Company a Capitalized $100 in Interest Costs During the Year