Question

Akash Computers Ltd. applied for a term loan of ₹ 10 Lac from Axis Bank and submitted to the bank its Statement of Profit & Loss for the year ended 31st March, 2021 and a Balance Sheet as at that date. The bank requires certain accounting ratios of the Company before providing the loan.

Following figures have been extracted from the financial statements of the Company:

Particulars	₹
Share Capital	1,00,000
General Reserve	2,00,000
Balance of Profit & Loss	(50,000)
Current Liabilities	1,25,000
Inventory	2,50,000
Trade Receivables	2,00,000
Marketable Securities	30,000
Cash at Bank	20,000
Tangible Fixed Assets	7,50,000
Loans @ 10%	4,00,000
12% Debentures	2,00,000

Net Profit for the year after interest and tax was ₹ 96,000. Rate of Income Tax was 50%.

Based on the above mentioned information you are required to answer the following questions:

Interest Coverage Ratio of the Company will be:

विकल्प

• 3 times

• 2.5 times

• 1.75 times

• 4 times

Answer 1

4 times

Explanation:

Interest Coverage Ratio = `"Net Profit before Interest and Tax"/"Fixed Interest Charges"`

Fixed Interest Charges = 10% Interest on Loan of ₹ 4,00,000 + 12% Interest on Debentures of ₹ 2,00,000

= 40,000 + 24,000

= ₹ 64,000

Net Profit before Interest and Tax is Calculated as follows:

Net Profit after Interest and Tax = ₹ 96,000

Net Profit before Tax = `96,000 xx 100/50`

= ₹ 1,92,000

Net Profit before Interest and Tax = Net Profit before Tax + Fixed Interest Charges

= 1,92,000 + 64,000

= ₹ 2,56,000

Interest Coverage Ratio = `(2,56,000)/(64,000)`

= 4 times