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Balance sheet and income statement data indicate the following: Bonds payable, 10% (due in two years) $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 550,000 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 (round to one decimal point)?
a) -5.5
b) -6.4
c) -6.5
d) -1.5

Respuesta :

jepessoa

Answer:

C) 6.5

Explanation:

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                                  $550,000

Income tax for year                                                          $80,000

Common dividends paid                                                  $50,000

Preferred dividends paid                                                  $15,000

First we have to calculate the EBIT = $550,000 (Income before income tax for year) + $100,000 (interest expense = $1,000,000 x 10%) = $650,000

The number of times bond interest charges were earned is calculated by dividing EBIT by interest expense = $650,000 / $100,000 = 6.5

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