Question

1.) Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,240,000		$620,000
Issue preferred $1 stock, $10 par	—		1,030,000
Issue common stock, $5 par	1,240,000		830,000

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 $372,000.

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.)

On January 1, the first day of the fiscal year, a company issues a $600,000, 4%, 10-year bond that pays semiannual interest of $12,000 ($600,000 × 4% × ½ year), receiving cash of $600,000.

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

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

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

Answer 1

1) Calculate earning per share

	Option 1	Option 2
Income before interest and tax	372000	372000
Less: Interest expense	124000	62000
Income before tax	248000	310000
Less: Income tax	99200	124000
Net income	148800	186000
Less: Preferred dividend	0	103000
Earning for common Stockholders	148800	83000
Share outstanding	248000	166000
Earning per share	0.60	0.50

2.)

On January 1, the first day of the fiscal year, a company issues a $600,000, 4%, 10-year bond that pays semiannual interest of $12,000 ($600,000 × 4% × ½ year), receiving cash of $600,000.

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

Jan 1	Cash	600000
	Bonds payable		600000

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

June 30	Interest expense	12000
	Cash		12000

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

Dec 31	Bonds payable	600000
	Cash		600000