Download Sample Exercises Chapter 11

Sample Exercises Chapter 11
1) Carter Co. is considering two alternatives to finance its construction of a new $2
million plant. Compare bond versus stock financing for:
a) Issuance of 200,000 shares of common stock at the market price of $10 per share.
b) Issuance of $2 million, 8% bonds at par
Income before interest and taxes
Interest ($2,000,000 X 8%)
Income before income taxes
Income tax expense (30%)
Net income (a)
Outstanding shares (b)
Earnings per share (a) ÷ (b)
Issue Stock
Issue Bond
$700,000
0
700,000
210,000
$490,000
$700,000
160,000
540,000
162,000
$378,000
700,000
$0.70
500,000
$0.76
Net income is higher if stock is used. However, earnings per share is lower
than earnings per share if bonds are used because of the additional shares
of stock that are outstanding.
2) Rich Co. issues $2 million, 10-year, 8% bonds at 97, with interest payable on July 1
and January 1.
a) Prepare the journal entry to record the sale of these bonds on January 1, 2008.
b) Assuming instead that the above bonds sold for 104, prepare the journal entry to record
the sale of these bonds on January 1, 2008.
(a) Jan. 1
Cash ($2,000,000 X .97) ............................
1,940,000
Discount on Bonds Payable ....................
60,000
Bonds Payable .................................
(b)
Jan.
1
Cash ($2,000,000 X 1.04) ..........................
Bonds Payable .................................
Premium on Bonds Payable..............
2,000,000
2,080,000
3) King Co. issues a $600,000, 10%, 10 year mortgage note on December 31, 2008, to
obtain financing for a new building. The terms provide for semiannual installment
payments of $48,145. Prepare the entry to record the mortgage loan on December 31,
2008, and the first installment payment.
2,000,000
80,000
(A)
Semiannual
Interest
Period
Issue Date
1
Dec.
31
June 30
Cash
Payment
$48,145
(B)
Interest
Expense
(D) X 5%
$30,000
(C)
Reduction
of Principal
(A) – (B)
(D)
Principal
Balance
(D) – (C)
$18,145
$600,000
581,855
Cash ............................................................ 600,000
Mortgage Notes Payable ................................
Interest Expense .....................................................
Mortgage Notes Payable.........................................
Cash ................................................................
600,000
30,000
18,145
48,145