Question

r 14 Long-Term Liabilities: Bonds and Notes ercises xercises OBJ. 1 p.679 PE 14-1A Alternative financing plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 issue 5% bonds (at face value) Issue preferred $1 stock, $20 par Issue common stock, $25 par $6,000,000 $2,000,000 6,000,000 4,000,000 6,000,000 Income tax is estimated at 40% of income Determine the earnings per share of common stock, assuming that income before bond interest and income tax is $800,000. 79 PE 14-1B Alternative financing plans OBJ. 1 Brower Co. is considering the following alternative financing plans: Plan 1 Plan 2 issue 10% bonds (at face value) lecuo preferred $2 50 stock. $25 par $4,000,000 $2,500,000 3,000,000

Answer 1

14-1A.

	plan 1	plan 2
Income before bond interest and income tax	800,000	800,000
less:interest on bonds (6,000,000*5%) (2,000,000*5%)	(300,000)	(100,000)
earnings before tax	500,000	700,000
less:income tax (500,000*40%) (700,000*40%)	(200,000)	(280,000)
net income	300,000	420,000
less; preferred dividend (nil) (6,000,000/20 *$1)	nil	(300,000)
earnings available for common stock holders	300,000	120,000
number of shares (6,000,000/25 par value) (4,000,000/25)	240,000	160,000
earnings per share on common stock (300,000/240,000) (120,000,160,000)	$1.25	$0.75

14.3B.

the following will be the journal entry:

date	account	debit	credit
1 st day of FY	Cash a/c	2,889,599
	Discount on bonds payable a/c	110,401
	...................To Bonds payable		3,000,000
	(since bonds payable are issued at a discount of 3,000,000-2,889,599 =>110,401).