Question

Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in two years) $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 550,000 Income tax for year 80,000 Common dividends paid 50,000 Preferred dividends paid 15,000 Based on the data presented, what is the times interest earned ratio? (Round to one decimal point.) a.6.4 b.1.5 c.5.5 d.6.5

Answer 1

Answer:

d.6.5

Explanation:

The formula to compute the times interest earned ratio is shown below:

Times interest earned ratio = (Earnings before interest and taxes) ÷ (Interest expense)

where,

Earnings before interest and taxes = Income before income tax for year + Interest

= $550,000 + $100,000

= $650,000

And, the interest expense = Bonds payable × rate of interest

                                           = $1,000,000 × 10%

                                           = $100,000

Now put these values to the above formula  

So, the ratio would equal to

= $650,000 ÷ $100,000

= 6.5 times