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Transcript
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