(Learning Objective 4: Measuring ability to pay long-term debt) Use the fi nancial statements of Gagnon, Inc., in Short Exercises 12-6 and 12-7.

❙ Requirements 1. Compute the company’s debt ratio at December 31, 20X6.

2. Compute the company’s times-interest-earned ratio for 20X6. For operating income, use income before both interest expense and income taxes. You can simply add interest expense back to income before taxes.

3. Is Gagnon’s ability to pay liabilities and interest expense strong or weak? Comment on the value of each ratio computed for questions 1 and 2.