Chapter Review
14-9ePractice Exercises
PE 14-1A
Alternative Financing Plans
Obj. 1
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EE 14-1 Desmond Co. is considering the following alternative financing plans:
Plan 1 Plan 2 Issue 5% bonds (at face value) $3,000,000 $1,000,000 Issue preferred $1 stock, $20 par — 3,000,000 Issue common stock, $10 par 3,000,000 2,000,000 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 $400,000.
PE 14-1B
Alternative Financing Plans
Obj. 1
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EE 14-1 Vatican Co. is considering the following alternative financing plans:
Plan 1 Plan 2 Issue 10% bonds (at face value) $6,000,000 $3,750,000 Issue preferred $2.50 stock, $25 par — 4,500,000 Issue common stock, $20 par 6,000,000 3,750,000 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 $3,000,000.
Obj. 3
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EE 14-2 The first day of the fiscal year, a company issues a $3,500,000, 5%, 10-year bond that pays semiannual interest of $87,500 ($3,500,000 × 5% × ½ year), receiving cash of $3,500,000. Journalize the entries to record (a) the issuance of the bonds, (b) the first interest payment, and (c) the payment of the principal on the maturity date.
PE 14-2B
Issuing Bonds at Face Amount
Obj. 3
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EE 14-2 The first day of the fiscal year, a company issues a $700,000, 6%, 10-year bond that pays semiannual interest of $21,000 ($700,000 × 6% × ½ year), receiving cash of $700,000. Journalize the entries to record (a) the issuance of the bonds, (b) the first interest payment, and (c) the payment of the principal on the maturity date.
PE 14-3A
Issuing Bonds at a Discount
Obj. 3
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EE 14-3 On the first day of the fiscal year, a company issues a $1,800,000, 6%, five-year bond that pays semiannual interest of $54,000 ($1,800,000 × 6% × ½), receiving cash of $1,725,151. Journalize the entry to record the issuance of the bonds.
PE 14-3B
Issuing Bonds at a Discount
Obj. 3
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EE 14-3 On the first day of the fiscal year, a company issues a $4,200,000, 10%, five-year bond that pays semiannual interest of $210,000 ($4,200,000 × 10% × ½), receiving cash of $4,041,710. Journalize the entry to record the issuance of the bonds.
PE 14-4A
Discount Amortization
Obj. 3
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EE 14-4 Using the bond from Practice Exercise 14-3A, journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar.
PE 14-4B
Discount Amortization
Obj. 3
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EE 14-4 Using the bond from Practice Exercise 14-3B, journalize the first interest payment and the amortization of the related bond discount. Round to the nearest dollar.
PE 14-5A
Issuing Bonds at a Premium
Obj. 3
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EE 14-5 On the first day of the fiscal year, a company issues an $8,600,000, 11%, five-year bond that pays semiannual interest of $473,000 ($8,600,000 × 11% × ½), receiving cash of $8,932,035. Journalize the bond issuance.
PE 14-5B
Issuing Bonds at a Premium
Obj. 3
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EE 14-5 On the first day of the fiscal year, a company issues a $5,300,000, 8%, five-year bond that pays semiannual interest of $212,000 ($5,300,000 × 8% × ½), receiving cash of $5,520,390. Journalize the bond issuance.
PE 14-6A
Premium Amortization
Obj. 3
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EE 14-6 Using the bond from Practice Exercise 14-5A, journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar.
PE 14-6B
Premium Amortization
Obj. 3
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EE 14-6 Using the bond from Practice Exercise 14-5B, journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar.
PE 14-7A
Redemption of Bonds Payable
Obj. 3
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EE 14-7 A $2,300,000 bond issue on which there is an unamortized discount of $107,500 is redeemed for $2,231,000. Journalize the redemption of the bonds.
PE 14-7B
Redemption of Bonds Payable
Obj. 3
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EE 14-7 A $1,900,000 bond issue on which there is an unamortized premium of $101,264 is redeemed for $1,979,000. Journalize the redemption of the bonds.
PE 14-8A
Journalizing Installment Notes
Obj. 4
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EE 14-8 On the first day of the fiscal year, a company issues $89,000, 6%, five-year installment notes that have annual payments of $21,128. The first note payment consists of $5,340 of interest and $15,788 of principal repayment.
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Journalize the entry to record the issuance of the installment notes.
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Journalize the first annual note payment.
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PE 14-8B
Journalizing Installment Notes
Obj. 4
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EE 14-8 On the first day of the fiscal year, a company issues $35,000, 5%, eight-year installment notes that have annual payments of $5,415. The first note payment consists of $1,750 of interest and $3,665 of principal repayment.
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Journalize the entry to record the issuance of the installment notes.
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Journalize the first annual note payment.
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PE 14-9A
Times Interest Earned
Obj. 6
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EE 14-9 Sprout Company reported the following on the company’s income statement in two recent years:
Current Year Prior Year Interest expense $ 510,000 $ 480,000 Income before income tax expense 5,610,000 6,720,000 -
Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place.
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Is the times interest earned ratio improving or declining?
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PE 14-9B
Times Interest Earned
Obj. 6
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EE 14-9 Mahmood Products Inc. reported the following on the company’s income statement in two recent years:
Current Year Prior Year Interest expense $ 270,000 $ 250,000 Income before income tax expense 4,212,000 3,450,000 -
Determine the times interest earned ratio for the current year and the prior year. Round to one decimal place.
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Is the times interest earned ratio improving or declining?
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