Question

The following financial information was obtained from the year ended 2018 income statements for Cash Automotive and Pennington Automotive:_______.
Cash Pennington
Net income $26,070 $74,188
Income tax expense 9,270 27,080
Interest expense 300 2,900
Requirements:
1. Compute the times-interest-earned ratio for each company Round to two decimals.
2. Which company was better able to cover its interest expense?

Answer 1

Answer:

1. Cash Automotive = 118.80 times and Pennington Automotive = 347.23 times

2. Pennington Automotive is better able to cover its interest expense. Because it can cover its interest more times than Cash Automotive.

Explanation:

The Times Interest Earned Ratio (TIE), measures how well a Company cover its interest obligations,

Times Interest Earned Ratio (TIE) = Earnings Before Interest and Tax (EBIT) ÷ Interest

Cash Automotive

Times Interest Earned Ratio (TIE) = ($26,070 + $9,270 + $300) ÷ $300

                                                       = 118.80 times

Pennington Automotive

Times Interest Earned Ratio (TIE) = ($74,188 + $27,080 + $2,900) ÷ $300

                                                       = 347.23 times