Question
In: Accounting
1. Effect of Financing on Earnings per Share Domanico Co., which produces and sells biking equipment,...
1. Effect of Financing on Earnings per Share
Domanico Co., which produces and sells biking equipment, is financed as follows:
| Bonds payable, 10% (issued at face amount) | $350,000 |
| Preferred $2 stock, $20 par | 350,000 |
| Common stock, $25 par | 350,000 |
Income tax is estimated at 40% of income.
Determine the earnings per share on common stock, assuming that the income before bond interest and income tax is (a) $126,000, (b) $161,000, and (c) $196,000.
Enter answers in dollars and cents, rounding to two decimal places.
a. Earnings per share on common stock $
b. Earnings per share on common stock $
c. Earnings per share on common stock $
2. Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method
On the first day of its fiscal year, Chin Company issued $15,800,000 of five-year, 10% bonds to finance its operations of producing and selling home improvement products. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 11%, resulting in Chin Company receiving cash of $15,204,522.
a. Journalize the entries to record the following:
- Issuance of the bonds.
- First semiannual interest payment. The bond discount amortization, using the straight-line method, is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
- Second semiannual interest payment. The bond discount amortization, using the straight-line method, is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar.
b. Determine the amount of the bond interest
expense for the first year.
$
c. Why was the company able to issue the bonds
for only $15,204,522 rather than for the face amount of
$15,800,000?b. Determine the amount of the bond
interest expense for the first year.
$
The market rate of interest is the contract rate of interest.
*please answer both- if you can't just the first one, thank you*
Solutions
Expert Solution
| 1 | |||
| a | b | c | |
| Income before bond interest and income tax | 126000 | 161000 | 196000 |
| Less: Bond interest | 35000 | 35000 | 35000 |
| Income before income tax | 91000 | 126000 | 161000 |
| Less: Income tax 40% | 36400 | 50400 | 64400 |
| Net income | 54600 | 75600 | 96600 |
| Less: Preferred dividends | 35000 | 35000 | 35000 |
| Net income for Common stockholders | 19600 | 40600 | 61600 |
| Divide by Common shares outstanding | 14000 | 14000 | 14000 |
| Earnings per share on common stock | 1.40 | 2.90 | 4.40 |
| a. Earnings per share on common stock | 1.40 | ||
| b. Earnings per share on common stock | 2.90 | ||
| c. Earnings per share on common stock | 4.40 |
| 2 | |||
| a | |||
| 1 | |||
| Cash | 15204522 | ||
| Discount on Bonds Payable | 595478 | ||
| Bonds Payable | 15800000 | ||
| 2 | |||
| Interest Expense | 849548 | ||
| Discount on Bonds Payable | 59548 | =595478/5*6/12 | |
| Cash | 790000 | =15800000*10%*6/12 | |
| 3 | |||
| Interest Expense | 849548 | ||
| Discount on Bonds Payable | 59548 | ||
| Cash | 790000 | ||
| b | |||
| Bond interest expense for the first year | 1699096 | =849548+849548 | |
| c | |||
| The market rate of interest is greater than the contract rate of interest. | |||
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