Question

Compute the times interest earned for Park Company, which reports income before interest expense and income tacxes of \(1,885,000 and interest expense of \)145,000. Interpret its times interest earned (assume that its competitors average a times interest earned of 4.0).

Short answer

The time interest earned by the comapny is 13 times.

Step-by-step solution

Definition of time interest earned

A time's interest earned ratio reflects a company's ability to pay its interest obligations.

Calculation of time's interest earned

A time's interest earned is calculated by dividing the net income before interest and taxes by interest expense.

$\begin{array}{rcl}\mathrm{Times}\mathrm{Interest}\mathrm{Earned}& =& \frac{\mathrm{Net}\mathrm{income}\mathrm{before}\mathrm{interest}\mathrm{expense}\&\mathrm{taxes}}{\mathrm{Interest}\mathrm{expense}}\\ & =& \frac{\$1,885,000}{\$145,000}\\ & =& 13\mathrm{times}\end{array}$

The time's interest earned by the company is better than the market avergae interest earned.