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Balance sheet and income statement data indicate the following: Bonds payable, 10% $1,000,000 Preferred 5% stock, $100 par (no change during the year 300,000 Common stock, $50 par (no change during the 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 time bond interest charges were earned (round to one decimal point)

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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

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