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

Question

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

Quizplus · Accepted Answer

The number of times interest is earned ratio is calculated by dividing the operating income by the interest expense. In this case, the operating income is $35,000 and the interest expense is $5,000, so the number of times interest is earned ratio is $35,000 / $5,000 = 7 times.

The Fortune Company Reported the Following Income for Year 2