Question

Q10. a. Damas Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 6% (issued at face amount) $5,000,000 Preferred $2.00 stock, $100 par 5,000,000 Common stock, $25 par 5,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $600,000, (b) $800,000, and (c) $1,200,000. b. Present entries to record the selected transactions described below. (a) Issued $2,750,000 of 10-year, 8% bonds at 97. (b) Amortized bond discount for a full year, using the straight-line method. (c) At the end of the third year, called bonds at 98. The bonds were carried at $2,692,250 at the time of the redemption. c. Brubeck Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize the entries to record the following selected transactions for the current year: May 1 Issued the bonds for cash at their face amount. Nov. 1 Paid the interest on the bonds. Dec. 31 Recorded accrued interest for two months.

Answer 1

Problem 1 – Calculation of Earnings Per Share

	(a)	(b)	(c )
Earnings before interest and taxes	$600,000	$800,000	$1,200,000
Less: Bond Interest (5,000,000*6%)	$300,000	$300,000	$300,000
Earnings before taxes	$300,000	$500,000	$900,000
Less: Tax @ 40%	$120,000	$200,000	$360,000
Earnings After Taxes	$180,000	$300,000	$540,000
Less: Preferred Dividends (Refer Note 1)	$100,000	$100,000	$100,000
Earnings available to Common Stockholders	$80,000	$200,000	$440,000
Divide by: Number of Common Shares (Refer Note 2)	200000	200000	200000
Earnings Per Share	$0.40	$1.00	$2.20

Note 1 - Preferred Dividend
Preferred Stock	$5,000,000
Divide by: Par Value	$100
Number of Preferred Shares	50000
x Preferred Stock Dividend per share	$2
Preferred Dividend	$100,000
Note 2 - Number of Common Shares Outstanding
Common Stock Capital	$5,000,000
Divide by: par Value	$25
Number of Outstanding Common Share	200000

Problem 2 – Journal Entries

	General Journal	Debit	Credit
(a)	Cash (2,750,000*97%)	$2,667,500
	Discount on Bonds Payable	$82,500
	Bonds Payable (par value)		$2,750,000
	(To record issuance of bonds at discount)
(b)	Interest Expense ($82,500 / 10)	$8,250
	Discount on Bonds Payable		$8,250
	(To record amortization of bonds discount)
(c )	Bonds Payable	$2,750,000
	Loss on Redemption (Balancing figure)	$2,750
	Discount on Bonds Payable (Unamortized Value) (82,500 / 10 * 7)		$57,750
	Cash (2,750,000*98%)		$2,695,000
	(To record redemption of bonds)

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