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Accounting Ratios — Accountancy STD 12 Commerce — Question

CBSE BoardEnglish MediumSTD 12 CommerceAccountancyAccounting Ratios3 Marks
Question
From the following information, calculate interest coverage ratio and give your comments also:
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Answer

Interest Coverage Ratio $=\frac{\text{Net profit before Interest & Income Tax}}{\text{Fiixed Interest Charges}}$
In the above question net profit after interest and tax is given, whereas net profit before interest and tax is required to calculate this ratio.
If profit after tax is 50, the profit before tax must be = 100
If profit after tax is 1,20,000, the profit before tax must be
$=\frac{100}{50}\times1,20,000=₹\ 2,40,000$
Interest paid on ₹ 1,00,000 debentures during the year at the rate of 15% amounts to ₹ 15,000 and on ₹ 1,00,000 mortgage loan at the rate of 12% amounts to ₹ 12,000.
Therefore, profit before payment of interest and tax = ₹ 2,40,000 + ₹ 27,000 (Interest) = ₹ 2,67,000.
Interest Coverage Ratio $=\frac{₹\ 2,67,000}{₹\ 27,000}=9.89 \text{ Times}.$

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