Question

Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in two years) $826,000 Preferred 5% stock, $100 par (no change during year) 277,000 Common stock, $50 par (no change during year) 1,530,000 Income before income tax for year 342,000 Income tax for year 79,000 Common dividends paid 76,500 Preferred dividends paid 13,850 Based on the data presented, what is the times interest earned ratio (rounded to one decimal place)

Answer 1

Answer:

5.1

Explanation:

Times interest earned ratio can be described as the ability of an organisation to make their debt payment within the stipulated period of time

The formular for calculating Times interest earned ratio is

= Earnings before interest and tax/Total interest payable

The interest exsense can be calculated as follows

Interest expense= $826,000×10/100

= $82,600

Since the income generated before income tax is $342,000

The time interest earned ratio is calculated as follows

= $342,000+ $82,600/$82,600

= $424,600/$82,600

= 5.14

= 5.1 ( rounded to 1 decimal place)

Hence the Times interest earned ratio is 5.1