general business data bank

BE 170
Layton Inc. is considering two alternatives to
finance its construction of a new $5 million plant.
(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.