Question

The Lancaster Corporation’s income statement is given below.

a. What is the times-interest-earned ratio?

Lancaster corporation
Sales	\(246,000
Cost of goods sold	122,000
Gross profit	\)124,000
Fixed charges (other than interest)	27,500
Income before interest and taxes	\(96,500
Interest	21,800
Income before taxes	\)74,700
Taxes (35%)	26,145
Income after taxes	$48,555

Short answer

The times-interest-earned ratio of Lancaster Corporation is 4.43.

Step-by-step solution

Time interest earned ratio

Time interest earned ratio is computed to measure the company’s ability to meet the interest obligations out of its current income.

Calculation of Time interest earned ratio

$\begin{array}{rcl}\mathrm{Time}\mathrm{interest}\mathrm{earned}\mathrm{ratio}& =& \frac{\mathrm{Earning}\mathrm{before}\mathrm{interest}\mathrm{and}\mathrm{taxes}}{\mathrm{Interest}\mathrm{expense}}\\ & =& \frac{\$96,500}{\$21,800}\\ & =& 4.43\end{array}$