Hsu Company reported the following on its income statement:
Interest expense was $80,000.Hsu Company's times interest earned ratio is
A) 8 times
B) 6.25 times
C) 5.25 times
D) 5 times

Question

Hsu Company reported the following on its income statement: ​
 Interest expense was $80,000.Hsu Company's times interest earned ratio is
A) 8 times 
B) 6.25 times 
C) 5.25 times 
D) 5 times

Quizplus · Accepted Answer

The times interest earned ratio is a measure of a company's ability to meet its interest payments with its operating income.

The formula for the times interest earned ratio is:

Times Interest Earned Ratio = Operating Income / Interest Expense

We are given that Hsu Company's interest expense was $80,000. However, we are not given their operating income. Therefore, we cannot calculate the ratio directly.

However, we can make an estimation by using the information given in the answer choices.

If we assume that the ratio is greater than 5 times (choice D), but less than 8 times (choice A), then the only option left is choice B) 6.25 times.

This means that Hsu Company's operating income is likely around $500,000 ($80,000 x 6.25 times).

While we cannot know the exact value of the ratio without more information, we can make a logical estimation based on the answer choices provided.

Hsu Company Reported the Following on Its Income Statement: ​

Hsu Company Reported the Following on Its Income Statement: