Balance sheet and income statement data indicate the following: Bonds payable, 1
ID: 2498175 • Letter: B
Question
Balance sheet and income statement data indicate the following:
Bonds payable, 10% (issued 1988 due 2012)
$1,000,000
Preferred 5% stock, $100 par (no change during year)
300,000
Common stock, $50 par (no change during year)
2,000,000
Income before income tax for year
350,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Based on the data presented above, what is the number of times bond interest charges were earned?
a.
3.7
b.
4.4
c.
4.5
d.
3.5
I am confuse, my calculation is not show the time correctly. Can anyone please show me the complete calculation of this problem.
Bonds payable, 10% (issued 1988 due 2012)
$1,000,000
Preferred 5% stock, $100 par (no change during year)
300,000
Common stock, $50 par (no change during year)
2,000,000
Income before income tax for year
350,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Explanation / Answer
The correct answer is c. 4.5
Times interest earned is calculated as Earnings before interest and taxes/ annual interest expense.
EBIT = Income before tax + annual interest expense = 350,000 + (1,000,000 x 10%) = $ 450,000
Annual interest expense is $ 100,000
Therefore, Times interest earned is 450,000 / 100,000 = 4.5
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