Question

E15.12 (LO4) Gilliland Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: Compare two alternatives of stock vs. issuance of bonds 1. Issue 90,000 shares of common stock at S30 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2, Issue 10%, 10-year bonds at face value for S2,700.000. It is estimated that the company will earn $800,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 120,000 shares of common stock outstanding prior to the new financing. . El 5.15 (LO 5) Adcock Company issued S600.000. 9%, 20-year bonds on January 1, 2020, at 103. Inter- est is payable annually on January 1. Adcock uses straight-line amortization for bond premium or discount Prepare entres foreconfissaance of bods, payment of interest, mortiza- tion of premium, and redemption at maturny Prepare the journal entries to record the following. a. The issuance of the bonds. b. The accrual of interest and the premium amortization on December 31, 2020 c. The payment d. The redemption of the bonds at maturity, assuming interest for the last interest period has been paid of interest on January 1, 2021 and recorded. .E15.16 (LO 5) Gridley Company issued S800.000. I 1%, 10-year bonds on December 31, 2019, for Prepare entriestorecord issuance of $730,000. Interest is payable annually on December 31. Gridley Company uses the straight-line method to amortize bond premium ods, payment of interest, amortia tion of discount, and redemption at maturny or discount. Prepare the journal entries to record the following. a. The issuance of the bonds. b. The payment of interest and the discount amortization on December 31, 2020. c. The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

Answer 1

Solution: 15.12)

	Plan 1- Issue Stock	Plan 2- Issue Bonds
Income before interest and taxes	800,000	800,000
Interest (2,700,000 * 10%)		270,000
Income before taxes	800,000	530,000
Income tax expense	240,000	159,000
Net income	560,000	371,000
Outstanding shares	210,000	120,000
Earning per share	2.67	3.09