Question

Balance sheet and income statement data indicate the following: Bonds payable, 11% (due in 15 years) $1,023,237 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 $383,882 Income tax for year $115,165 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)

Answer 1

The times interest earned (TIE) ratio = 4.41 times

Step-by-step explanation:

The times interest earned (TIE) ratio is an accounting ratio that shows the extent to which the income income of an organization can be used to cover its future interest expenses. This can be calculated as follows:

TIE Ratio = Earning before interest and tax (EBIT) / Interest expenses

Since,

Bonds payable, 11% (due in 15 years) = $1,023,237

Interest expenses = 11% * $1,023,237 = $112,556.07

Income before income tax for year = $383,882

EBIT = Interest expenses + Income before income tax for year = $112,556.07 + $383,882 = $496,438.07

Therefore, we have:

The times interest earned (TIE) ratio = $496,438.07 / $112,556.07 = 4.41 times

This shows that the income is 4.41 times greater than its annual interest expense. That is, the income can cover the annual interest 4.41 times.