Question

Alternative Financing Plans

Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,960,000		$980,000
Issue preferred $1 stock, $10 par	—		1,630,000
Issue common stock, $5 par	1,960,000		1,310,000

Income tax is estimated at 40% of income.

Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $588,000.

Enter answers in dollars and cents, rounding to two decimal places.

Plan 1	$ Earnings per share on common stock
Plan 2	$ Earnings per share on common stock

2.

Issuing Bonds at a Face Amount

On January 1, the first day of the fiscal year, a company issues a $200,000, 9%, 10-year bond that pays semiannual interest of $9,000 ($200,000 × 9% × ½ year), receiving cash of $200,000.

(a)  Journalize the entry to record the issuance of the bonds.

	Interest Expense

(b)  Journalize the entry to record the first interest payment on June 30.

	Cash

(c)  Journalize the entry to record the payment of the principal on the maturity date.

3.

Discount Amortization

On the first day of the fiscal year, a company issues a $6,700,000, 10%, 10-year bond that pays semiannual interest of $335,000 ($6,700,000 × 10% × ½), receiving cash of $5,931,516.

Journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

	Interest Expense
	Discount on Bonds Payable
	Cash

Answer 1

1) calculate earning per share

	Plan 1	Plan 2
Earning before interest and tax	588000	588000
Less; interest expense @10%	-196000	-98000
Earning before tax	392000	490000
Less: Income tax	-156800	-196000
Net income	235200	294000
Less: Preferred dividend	0	-163000
Earning for common stockholders	235200	131000
Share outstanding	392000	262000
EPS	0.60	0.50

2) Journal entries

Date	account and explanation	debit	credit
Jan 1	Cash	200000
	Bonds payable		200000
	(To record bond issue)
June 30	Interest expense	9000
	Cash		9000
	(To record interest)
	Bonds payable	200000
	Cash		200000
	(To record maturity)

3) Journal entry

Date	account and explanation	debit	credit
	Interest expense	373424
	Discount on bonds payable (768484/20)		38424
	Cash		335000
	(To record interest)