Question

Balance sheet and income statement data indicate the following:

Bonds payable, 10% (issued 1988 due 2012) $1,000,000
Preferred 5% stock, $100 par (no change during year) 300,000
Common stock, $50 par (no change during 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 times bond interest charges were earned?
a. 3.7
b. 4.4
c. 4.5
d. 3.5

Answer 1

The number of times bond interest charges were earned is calculated using the times interest earned ratio, which is 3.5 in this case. Therefore, the correct option is D.

Step-by-step explanation:

To determine the number of times bond interest charges were earned, you must calculate the times interest earned ratio. This is done by dividing the income before income tax by the bond interest charges. In the given scenario, bond interest for the year would be 10% of $1,000,000, which is $100,000. The income before tax is $350,000. Therefore, the calculation would be $350,000 divided by $100,000, which equals 3.5. This indicates that the earnings for the year covered the bond interest charges 3.5 times, signifying that the income was sufficient to cover the interest expenses on the bonds.

The correct answer was option d. 3.5.