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.

Answer 1

Answer:

Number of times bond interest charges were earned = 5.44

Explanation:

Given data,

Bond Interest Rate = 6%

Bond Amount = $1200000

Net Income before Income Tax = $320000

Bond Interest charges Earned :

= Bond Value × Interest Rate

= $1,200,000 × 6%

= $72,000

Net Income before Interest :

= Net Income Income Before Interest + Interest

= $320,000 + $72,000

= $392,000

Number of times bond interest charges were earned :

= Net Income before Interest and taxes ÷ Interest charges

= (392,000 ÷ 72,000 )

= 5.4444

Number of times bond interest charges were earned = 5.44