alleryIncome before income tax is $314,000 and interest expense is $55,000. What is the number of times interest charges are earned (to one decimal)?
A4.7
B5.7
C6.7
D1.2
Answer & Solution
Correct answer: C. 6.7
1. Ratio = (income before income tax + interest expense) / interest expense.
2. Interest is added back because it was already deducted to reach income before tax.
3. = ($314,000 + $55,000) / $55,000 = $369,000 / $55,000.
4. = 6.7.
5. Trap: 5.7 (option B) omits the add-back of interest in the numerator.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §7.3.4 "Number of Times Interest Charges Are Earned", p.302_
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