Question

1.

On the first day of the fiscal year, a company issues a $4,400,000, 8%, 7-year bond that pays semiannual interest of $176,000 ($4,400,000 × 8% × ½), receiving cash of $3,767,084.

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.

2.

On the first day of the fiscal year, a company issues a $4,300,000, 10%, 9-year bond that pays semiannual interest of $215,000 ($4,300,000 × 10% × ½), receiving cash of $4,561,441.

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

3.

A $910,000 bond issue on which there is an unamortized premium of $83,000 is redeemed for $812,000.

Journalize the redemption of the bonds. If an amount box does not require an entry, leave it blank.

4.

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)	$900,000
Preferred $2 stock, $20 par	900,000
Common stock, $25 par	900,000

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) $297,000, (b) $387,000, and (c) $477,000.

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 $

Answer 1

1
Interest expense	221208
Discount on Bonds payable		45208	=(4400000-3767084)/7*6/12
Cash		176000
2
Interest expense	200475
Premium on Bonds payable	14525		=(4561441-4300000)/9*6/12
Cash		215000
3
Bonds payable	910000
Premium on Bonds payable	83000
Cash		812000
Gain on bond redemption		181000

4

a
Income before bond interest and income tax	297000
Less: Bond interest expense	90000
Income before income tax	207000
Less: Income tax expense 40%	82800
Net income	124200
Less: Preferred Dividends	90000	=(900000/20)*2
Net income for Common Stockholders	34200
Divide by Common Shares outstanding	36000	=900000/25
Earnings per share on common stock	0.95
b
Income before bond interest and income tax	387000
Less: Bond interest expense	90000
Income before income tax	297000
Less: Income tax expense 40%	118800
Net income	178200
Less: Preferred Dividends	90000
Net income for Common Stockholders	88200
Divide by Common Shares outstanding	36000
Earnings per share on common stock	2.45
c
Income before bond interest and income tax	477000
Less: Bond interest expense	90000
Income before income tax	387000
Less: Income tax expense 40%	154800
Net income	232200
Less: Preferred Dividends	90000
Net income for Common Stockholders	142200
Divide by Common Shares outstanding	36000
Earnings per share on common stock	3.95