Question

еВook Show Me How Calculator Print Item Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 2 Plan 1 $1,240,000 Issue 10% bonds (at face value) $620,000 Issue preferred $1 stock, $10 par 1,030,000 Issue common stock, $5 par 830,000 1,240,000 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. Earnings per share on common stock Plan 1 Earnings per share on common stock Plan 2 2 more Check My Work uses remaining Check My Work

Answer 1

A C 1 1) Plan 1 Plan 2 2 3 Earnings Before bond interest and income tax 4 Less: Bond interest expense 5 Earnings before income tax $ 372,000 $372,000 $ 124,000 $ 62,000 $ 248,000 $ 310,000 $99,200 124,000 $ 148,800 $186,000 $103,000 $148,800 $83,000 248000 0.60 $ 6 Less: Income tax 7 Net income 8 Preferred stock dividend 9 Earnings available for common stock 10 Number of common shares 166000 11 Earnings per share 0.50

A B C 1 1 Plan 1 Plan 2 372000 372000 3 Earnings Before bond interest and income tax 4 Less: Bond interest expense -1240000*10% -620000*10% 5 Earnings before income tax |-+с3-С4 +B3-B4 +B5*40% +C5*40% 6 Less: Income tax 7 Net income =+C5-C6 +B5-B6 =1030000/10*1 8 Preferred stock dividend +C7-C8 9 Earnings available for common stock +B7-B8 - 1240000/5 +B9/B10 -830000/5 ЕC9/с10 10 Number of common shares Earnings per share 11

2) Account Titles and Explanation Debit Credit Cash $ 5,230,630 $ 369,370 Discount on Bonds payable ($5,600,000-$5,230,630) Bonds payable $5,600,000 (To record the bond issuance) 3) Account Titles and Explanation Debit Credit Interest expense $ 274,621 $ Discount on bond payable 22,621 Cash 252,000 (To record the first interest payment and amortization) Discount on bonds payable $5,600,000-$5,419,030 = $180,970 Numbert of periods 4*2 8 Amortization of discount $180,970/8=$22,621.25 or $22,621 (Rounded-off)