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) 5.72B) 6.83C) 4.72D) 4.83

Question

Business

Alice Trevino

4 March, 07:32

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) 5.72B) 6.83C) 4.72D) 4.83

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Spot · Answer 1

The correct option is A, 5.72 times

Explanation:

The number of times that interest charges gives a sense of how financial stable is in its ability to pay interest on bonds as at when due. It is key consideration for prospective bondholders when assessing whether to buy bonds in a particular company

Number of times interest charges earned=net income before interest/interest

net income before interest charges=net income+interest charges

net income is $340,000

interest charges=$1,200,000*6%=$72,000

net income before interest charges=$340,000+$72,000=$412,000

number of times interest was earned=$412,000/$72,000=5.72