Interest
Coverage Ratio
Question 66:
If Net Profit before Interest and Tax is ₹10,00,000 and interest on Long-term Funds is ₹2,00,000,
find Interest Coverage Ratio.
Answer:
Net Profit before Interest and Tax = 10,00,000
Interest = 2,00,000
Interest Coverage Ratio= Net Profit before Interest
and Tax/Interest
Interest
Coverage Ratio =10,00,000/2,00,000
Interest
Coverage Ratio = 5 times
Question 67:
From the following information, calculate Interest
Coverage Ratio: Profit after Tax ₹4,25,000; Tax
₹75,000; Interest on Long-term Funds ₹1,25,000.
Answer:
Profit before Interest and Tax = Profit after Tax +
Tax +Interest
Profit before Interest and Tax = 4,25,000
+ 75,000 + 1,25,000
Profit
before Interest and Tax = 6,25,000
Interest Coverage Ratio= Net Profit before Interest
and Tax/Interest
Interest Coverage Ratio =6,25,000/1,25,000=5
times
Question 68;
From the following
detail, calculate Interest Coverage ratio;
|
Net profit
after Tax |
₹7,00,000 |
|
6%
Debentures |
₹20,00,000 |
|
Tax Rate
30% |
|
Answers;
Interest
coverage ratio= net profit before interest and tax/ interest on long term debt
Interest
coverage ratio =11,20,000/1,20,000
Interest
coverage ratio =9.33
Working notes;
Wn-1
Net
profit after tax=7,00,000
Tax
rate 30%
Net
profit after tax = 70%
Net
profit before tax=7,00,000 × 100/70
Net
profit before tax= 10,00,000
Wn-2
Interest
on loan term borrowings=20,00,000×6/100=1,20,000
Net
profit before Interest and tax= 10,00,000+1,20,000=11,20,000
Question 69;
From the
following information, calculate Interest Coverage ratio;
Net profit after interest andTax
₹1,20,000;Rate of Income tax; 40%; 15%Debentures
₹1,00,000;12% Mortgage loan ₹1,00,000.
Answers;
Interest
coverage ratio = net profit before interest and tax / interest on long term
debt
Interest
coverage ratio = 2,27,000/ 27,000
Interest
coverage ratio = 8.41 times
Working notes;
Wn-1
Net
profit after interest and tax 1,20,000
Rate
of income tax 40%
Net
profit before tax= 60%
Net
profit before tax=1,20,000×100/60=2,00,000
Wn-2
Interest
on long term borrowings= 27,000
Interest
on debenture= 1,00,000× 15 / 100= 15,000
Interest
on 12% Mortgage loan= 1,00,000×12 / 100= 12,000
Net
profit before interest and tax= 2,00,000+ 27,000
=2,27,000
Question 70:
From the following information, calculate Interest
Coverage Ratio:
|
|
₹ |
|
10,000 Equity Shares of ₹10
each |
1,00,000 |
|
8% Preference Shares |
70,000 |
|
10% Debentures |
50,000 |
|
Long-term Loans from Bank |
50,000 |
|
Interest on Long-term Loans from
Bank |
5,000 |
|
Profit after Tax |
75,000 |
|
Tax |
9,000 |
Answer:
Interest on 10% debentures=50,000×10/1000=5,000
Profit before Interest and Tax = Profit after Tax + Tax +
Interest on Debentures + Interest on Long-term Loans from Bank
Profit before Interest and Tax = 75,000 + 9,000 + 5,000 +
5,000
Profit before Interest and Tax = 94,000
Total Interest Amount = Interest on Debentures + Interest on
Long-term loans from Bank
Total Interest Amount = 5,000 + 5,000
Total Interest Amount = 10,000
Interest Coverage Ratio = Net Profit before Interest and
Tax/Interest
Interest Coverage Ratio = 94,000/10,000
Interest Coverage Ratio = 9.4 times
Ts Grewal Solution 2025-2026
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Class 12 / Volume – III
Chapter 4 – Accounting Ratios