Balance sheet and income statement data indicate the following: Bonds payable, 6% (this is year 4 of 20 years) $1,200,000 Income before income tax for year 340,000 Income tax for year 80,000 Interest payable 9,000 Interest receivable 26,000 Based on the data presented above, what is the times interest earned ratio? (Round to two decimal places.)

 Interest coverage  =  5.72  times

Explanation:

The interest coverage ratio or the times interest earned is a measure of the ability of a business to meets its interest obligation for a period using the earnings made from the same period. The higher the ratio the better

Times Interest earned

= Earnings before interest and tax / Interest expense for the period

Earning before Interest and tax = Earnings before tax + Interest

=  340,000 +72,000.00

=  412,000.00

Note that we had to add back the interest  because it has already been deducted to arrive at the Earnings before tax of $340,000

Interest expense for the period = coupon rate × Nominal value of bond

= 6% × $1,200,000 =  72,000.00

Times interest earned =  412,000./ 72,000

                                     =  5.72  times

We also ignore the interest payable because it does not relate to the current year

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