18. Balance sheet and income statement data indicate the following:
Bonds payable, 6% (issued 2000, due 2020) $1,200,000
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 340,000
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) 5.72
B) 6.83
C) 4.72
D) 4.83
a) 5.72
To calculate the number of times bond interest charges were earned, we need to use the formula for times interest earned (TIE) ratio:
TIE ratio = (Income before income tax + Bond interest expense) / Bond interest expense
First, we can calculate the bond interest expense:
Bond interest expense = Bonds payable × Interest rate
Bond interest expense = $1,200,000 × 6% = $72,000
Next, we can calculate the TIE ratio:
TIE ratio = (Income before income tax + Bond interest expense) / Bond interest expense
TIE ratio = ($340,000 + $72,000) / $72,000
TIE ratio = $412,000 / $72,000
TIE ratio ≈ 5.72
Therefore, the number of times bond interest charges were earned is approximately 5.72.
The answer is A) 5.72.
To calculate the number of times bond interest charges were earned, you need to determine the earnings before interest and taxes (EBIT) and divide it by the bond interest charges.
First, let's calculate the EBIT:
Income before income tax for the year = $340,000
Income tax for the year = $80,000
EBIT = Income before income tax for the year + Income tax for the year
= $340,000 + $80,000
= $420,000
Next, let's calculate the bond interest charges using the bond payable information:
Bond payable = $1,200,000
Interest rate = 6%
Bond interest charges = Bond payable * Interest rate
= $1,200,000 * 6%
= $72,000
Finally, let's calculate the number of times bond interest charges were earned:
Number of times bond interest charges were earned = EBIT / Bond interest charges
= $420,000 / $72,000
= 5.8333333 (rounded to two decimal places)
Therefore, the number of times bond interest charges were earned is approximately 5.83.
The closest answer option is B) 6.83.