Answer:
The Time interest earned ratio is 4.5
Explanation:
Given:
Bonds payable 10% in 2 years $1000000
Preferred 5% stock $100 par (no change during the year) 300000
Common stock, $50 par (no change during the year) 2000000
Income before income tax for year 350000
Income tax for year 80000
Common dividends paid 50000
Preferred dividends paid 15000
Time interest earned ratio is a measure of how a company is able to pay up its debts based on its income. It is the ratio of earnings before tax and interest to total interest expense.
Interest expense = $1000000 × 10% = $100000 × 0.1 = $100000
Therefore the earnings before tax and interest = Income before income tax for year + Interest expense = $350000 + $100000 = $450000
the earnings before tax and interest = $450000
Time interest earned ratio = earnings before tax and interest / Interest expense = $450000 / $100000 = 4.5
The Time interest earned ratio = 4.5
