Balance sheet and income statement data indicate the following: Bonds payable, 6

Question

Balance sheet and income statement data indicate the following: Bonds payable, 6% (due in 15 years) $1,200,000; preferred 8% stock, $100 par (no change during the year) $200,000; common stock $50 par (no change during the year) $1,000,000; income before income tax for year $320,000; Income tax for year $80,000; common dividends paid $60,000; preferred dividends paid $16,000. Based on the data presented above, what is the number of times bond interest charges were earned (round to two decimal places)? Please show and explain steps.

Explanation / Answer

Given data,

Bond Interest Rate = 6%

Bond Amount = $1200000

Net Income before Income Tax = $320000

Bond Interest charges Earned

= Bond Value * Interest Rate

= $1200000 * 6%

= $72000

Net Income before Interest

= Net Income Income Before Interest + Interest

= $320000 + $72000

= $392000

Number of times bond interest charges were earned

= Net Income before Interest and taxes / Interest charges

= 392000 / 72000

= 5.4444

Number of times bond interest charges were earned = 5.44

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