The following data were taken from recent annual reports of Southwest Airlines, which operates a low-fare airline service

The following data were taken from recent annual reports of Southwest Airlines, which operates a low-fare airline service to over 50 cities in the United States:


Current Year Preceding Year
Interest expense $167,000,000 $186,000,000
Income before income tax 745,000,000 164,000,000


a. Determine the number of times interest charges are earned for the current and preceding years. Round to one decimal place.

b. What conclusions can you draw?


Answer:

a. Number of times interest charges earned:
Current year:
Preceding year:
$745,000,000 + $167,000,000
$167,000,000
$164,000,000 + $186,000,000
$186,000,000
= 5.5
= 1.9


b. The number of times interest charges are earned has increased from 1.9 in the prior year to 5.5 in the current year. Although Southwest Airlines had enough earnings to pay interest in the preceding year, the improvement in this ratio will be welcomed by the debtholders.