Consignment Shipments, Inc. had a times interest earned ratio of 11 to 1 in 2016. In 2017 the company incurred a substantial increase in interest expense with no overall effect on net income or taxes. The effect of the transaction is:
A) The ratio increased.
B) The ratio remained the same.
C) The ratio decreased.
D) There is insufficient information to predict the effect.

Question

Quizplus · Accepted Answer

The interest payment transaction increases both the numerator and the denominator of the ratio by the same amount. The ratio decreases.
Example: $11,000 / $1,000 = 11. $11,000 + $1,000 / $1,000 + $1,000 = 6