Layton Inc. is considering two alternatives to finance its construction

BE 170

Layton Inc. is considering two alternatives to finance its construction of a new $5 million plant.

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(a) Issuance of 500,000 shares of common stock at the market price of $10 per share.

(b) Issuance of $5 million, 9% bonds at par.

Instructions

Complete the following table.

Issue Stock Issue Bonds

Income before interest and taxes $2,000,000 $2,000,000

Interest expense from bonds _________ _________

Income before income taxes $ $

Income tax expense (30%) _________ _________

Net income $________ $________

Outstanding shares _________ 700,000

Earnings per share _________ _________

Outstanding shares (b) 1,200,000 700,000

Earnings per share (a)÷ (b) $1.17 $1.55

BE 171

On January 1, 2012, Morris Enterprises issued 9%, 5-year bonds with a face amount of $800,000 at par. Interest is payable semiannually on June 30 and December 31.

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment.

BE 172

On January 1, 2012, Bose Company issued bonds with a face value of $800,000. The bonds carry a stated interest of 7% payable each January 1 and July 1.

Instructions

a. Prepare the journal entry for the issuance assuming the bonds are issued at 95.

b. Prepare the journal entry for the issuance assuming the bonds are issued at 105.

BE 173

On July 1, 2012, Frog Corporation issued $600,000, 8%, 10-year bonds at face value. Interest is payable semiannually on January 1 and July 1. Frog Corporation has a calendar year end.

Instructions

Prepare all entries related to the bond issue for 2012.

BE 174

On January 1, 2012, Zappa Enterprises sold 8%, 20-year bonds with a face amount of $1,000,000 for $950,000. Interest is payable semiannually on July 1 and January 1.

Instructions

Calculate the carrying value of the bond at December 31, 2012 and 2013.

BE 175

Queen Company issued bonds with a face amount of $1,600,000 in 2007. As of January 1, 2012, the balance in Discount on Bonds Payable is $4,800. At that time, Queen redeemed the bonds at 102.

Instructions

Assuming that no interest is payable, make the entry to record the redemption.

BE 176

Roxy Inc. issues a $1,300,000, 10%, 10-year mortgage note on December 31, 2012, to obtain financing for a new building. The terms provide for semiannual installment payments of $106,291.

Instructions

Prepare the entry to record the mortgage loan on December 31, 2012, and the first installment payment.

………………………………………………………………………….. 106,291

BE 177

Fresh Corporation reports the following selected financial statement information at December 31, 2012:

Total Assets $120,000

Total Liabilities 75,000

Net Income 20,000

Interest Revenue 1,600

Interest Expense 800

Income Tax Expense 400

Instructions

Calculate the debt to total assets and times interest earned ratios.

BE 178

On January 1, 2012, Tape Enterprises issued 9%, 10-year bonds with a face amount of $900,000 at 96. Interest is payable semiannually on June 30 and December 31. The bonds were issued for an effective interest rate of 10%.

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses effective-interest amortization.

BE 179

On January 1, 2012, Hogan Enterprises issued 8%, 20-year bonds with a face amount of $5,000,000 at 101. Interest is payable semiannually on June 30 and December 31.

Instructions

Prepare the entries to record the issuance of the bonds and the first semiannual interest payment assuming that the company uses straight-line amortization.

EXERCISES

Ex. 180

Sophia Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.

(a) Issue 400,000 shares of common stock at $10 per share.

(b) Issue 8%, 10-year bonds at par ($4,000,000).

Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 shares of common stock outstanding prior to the new financing.

Instructions

Calculate each of the following for each alternative:

(1) Net income.

(2) Earnings per share.

Ex. 181

The board of directors of Moore Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market. Moore Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 35%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased.

Ex. 181 (Cont.)

Instructions

Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering.

Ex. 182

Slotkin Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

1. Issue 50,000 shares of $10 par value common stock at $50 per share.

2. Issue $3,000,000, 10%, 10-year bonds at par.

It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 40% and has 80,000 shares of common stock outstanding prior to the new financing.

Instructions

Determine the effect on net income and earnings per share for these two methods of financing.

Ex. 183

Three plans for financing a $20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%.

Plan 1 Plan 2 Plan 3

9% Bonds — — $10,000,000

6% Preferred Stock, $100 par — $10,000,000 5,000,000

Common Stock, $10 par $20,000,000 10,000,000 5,000,000

Total $20,000,000 $20,000,000 $20,000,000

It is estimated that income before interest and taxes will be $5,000,000.

Instructions

Determine for each plan, the expected net income and the earnings per share on common stock.

Ex. 184

Korean Corporation issued $2 million, 10-year, 6% bonds on January 1, 2012.

Instructions

Prepare the entry to record the sale of these bonds, assuming they were issued at

(a) 97.

(b) 104.

Ex. 185

On January 1, 2012, Lost Corporation issued $800,000, 8%, 10-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Lost Corporation has a calendar year end.

Instructions

Prepare all entries related to the bond issue for 2012.