Balance sheet and income statement data indicate the following: bonds payable, 6% (due in 15 years) $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 $320,000; 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)? show and explain steps.

Number of times bond interest charges were earned = 5.44

Explanation:

Given data,

Bond Interest Rate = 6%

Bond Amount = $1200000

Net Income before Income Tax = $320000

Bond Interest charges Earned :

= Bond Value × Interest Rate

= $1,200,000 × 6%

= $72,000

Net Income before Interest :

= Net Income Income Before Interest + Interest

= $320,000 + $72,000

= $392,000

Number of times bond interest charges were earned :

= Net Income before Interest and taxes ÷ Interest charges

= (392,000 ÷ 72,000 )

= 5.4444

Number of times bond interest charges were earned = 5.44

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