Balance sheet and income statement data indicate the following: Bonds payable, 6% due in 15 years)Preferred 8% stock, $100 par no change during the year)$1,200,000
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)?
A) 5.00
B) 5.44
C) 4.00
D) 4.33

Question

Quizplus · Accepted Answer

To calculate the number of times bond interest charges were earned, we use the times interest earned (TIE) ratio, which is calculated as follows:

TIE = (Income before income tax + Interest expense) / Interest expense

Interest expense for the bonds payable can be calculated as follows:

Interest expense = Bonds payable × Interest rate
= $1,200,000 × 6%
= $72,000

Substituting the values in the TIE ratio formula, we get:

TIE = (320,000 + 72,000) / 72,000
= 5.44 (rounded to two decimal places)

Therefore, the number of times bond interest charges were earned is 5.44, which is closest to option B (5.44).

Balance Sheet and Income Statement Data Indicate the Following: Bonds