A company has $100,000 of outstanding bonds paying 8.5% annually and income of $50,000 before interest and taxes.How will the company calculate the interest coverage (accrual basis)ratio?

Question

Quizplus · Accepted Answer

The interest coverage ratio is calculated by dividing income before interest and taxes by the interest expense. In this case, the interest expense would be 8.5% of the face value of the outstanding bonds (i.e. $8,500) since the question does not provide any information on the carrying value of the bonds. Therefore, the interest coverage ratio would be $50,000 / $8,500 = 5.88.

A Company Has $100,000 of Outstanding Bonds Paying 8