Question

El journalize i liabilities on December 31, 20109 U Proxluctions tocal n zation method E14-19 Preparing Learning Objective 1 rest rate is 6%, Benson Realty the bonds pay interest semiannually ing an amortization schedule and recording mortgages payable entries Company purchased a building and land with a fair market Kellerman Company P of en on building, $425,000, and land, $125,000) on January 1, 2018. Kellerman ada 20-year, 6% mortgage payable. Kellerman will make monthly payments of 1040 37. Round to two decimal places. Explanations are not required for journal 3. Interest Expense $2.750.00 uance. ective interest amortization method Round to the nearest dollar) equirement 1, journalize issuance of Requirements 1. Journalize the mortgage payable issuance on January 1, 2018 2. Prepare an amortization schedule for the first two payments. 3. Journalize the first payment on January 31, 2018 4. Journalize the second payment on February 28, 2018 Learning Objective 2 EPS Plan A 5195 E14-20 Analyzing alternative plans to raise money SB Electronics is considering two plans for raising $4,000,000 to expand operations Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of com mon stock. Before any new financing, SB Electronics has net income of $350,000 and 300,000 shares of common stock outstanding Management believes the company can use the new funds to earn additional income of $700,000 before interest and tases. The income tax rate is 30%. Analyze the SB Electronics situation to determine which plan will result in higher earnings per share. Use Exhibit 14-6 as a guide Learning Objectives 2, 3 E14-21 Determining bond prices and interest expense Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to borrow for a major expansion. The owner, Shane Jones, asks your advice on some related matters 2. Market price $436,100 CHAPTER 14

Answer 1

E: 14-20:

Plan A will result in higher earnings per share.

	Plan A	Plan B
Incremental EBIT	$ 700,000	$ 700,000
Interest Expense	360,000	0
Earnings before taxes	340,000	700,000
Taxes @ 30 %	102,000	210,000
Incremental Net Income	238,000	490,000
Existing Net Income	350,000	350,000
Total Net Income	588,000	840,000
Common Shares Outstanding	300,000	800,000
Earnings per Share	$ 1.96	$ 1.05

E: 14-21:

1.a. Bonds issued at par.

b. Bonds issued at a discount.

c. As the market interest rate exceeds the coupon rate of 9 %, Jones Company can expect to issue the bonds at a discount, i.e, the amount received would be less than $ 490,000.

2. If the bonds are issued at 89, price of the bonds = $ 490,000 x 89 % = $ 436,100.

3. Amount of bond interest paid each year = $ 490,000 x 9 % = $ 44,100.

Interest expense for the first year = $ 436,100 x 12 % = $ 52,332. ( If the effective interest method is used )

Interest expense for the first year = $ 44,100 + $ ( 490,000 - 436,100) / 5 = $ 54,880. ( If the straight line method is used ).