Desjardin Landscaping's income statement reports net income of $75,300, which includes deductions for interest expense of $11,500 and income taxes of $34,900. Its times interest earned is:
A) 0.15 times
B) 7.5 times
C) 10.6 times
D) 4.0 times
E) 6.5 times

Question

Quizplus · Accepted Answer

Times interest earned is computed by dividing earnings before interest and taxes (EBIT) by interest expense.

We can use the formula:

Times interest earned = EBIT / Interest expense

From the information provided, we can compute EBIT as:

EBIT = Net income + Interest expense + Income taxes 
EBIT = $75,300 + $11,500 + $34,900 
EBIT = $121,700

Therefore, times interest earned = $121,700 / $11,500 = 10.6 times

The best choice is C) 10.6 times, because it represents the number of times EBIT covers interest expense, indicating the company's ability to meet its interest obligations.

Desjardin Landscaping's Income Statement Reports Net Income of $75,300, Which