Balance sheet and income statement data indicate the following: Bonds payable, 11% (due in 15 years)...
Balance sheet and income statement data indicate the following:
Bonds payable, 11% (due in 15 years) $1,309,243 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 $422,668 Income tax for year $126,800 Common dividends paid $60,000 Preferred dividends paid $16,000 Based on the data presented above, what is the times interest earned ratio (round to two decimal places)? a.2.93 b.1.05 c.2.05 d.3.93
Homework Answers
The Times Interest Earned ratio measures the ability of a company to meet its debt obligations on a periodic basis.This ratio can be calculated by dividing a company’s EBIT by interest expense. The ratio shows the number of times that a company can pay its interest Expenses.
Interest expense = Bonds payable × Rate.
Interest expense = $ 1,309,243 × 11% = $ 144,016.73
Given, income before income tax = $ 422668 we require the earning before income tax i.e EBIT which is earning before deduction of the interest expense, so the interest will be added to get EBIT.
Thus EBIT = $ 422,668 + $ 144016.73. = $ 566684.73.
Thus times Interest earned ratio = EBIT / Interest expenses.
Times interest earned ratio = $ 566684.73 / 144016.73.
Times interest earned ratio. = 3.93.
Thus the correct Option is--------D i.e $ 3.93
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Balance sheet and income statement data indicate the
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