Question

Balance sheet and income statement data indicate the following: Bonds payable, 12% (due in 15 years) $1,219,553 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 $370,069 Income tax for year $111,021 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.2.53 b.1.77 c.0.77 d.3.53

Answer 1

d.3.53

Step-by-step explanation:

times interest earned ratio = EBIT / interest expense

• interest expense = bonds payable x interest rate = $1,219,553 x 12% = $146,346.36
• EBIT = Income before income tax for year + interest expense = $370,069 + $146,346.36 = $516,415.36

times interest earned ratio = $516,415.36 / $146,346.36 = 3.5287 ≈ 3.53

Preferred dividends are not considered interest expense.