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1.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax
Bond interest
Income before income tax
Income tax
Net income
Dividends on preferred stock
Earnings available for common stock
Shares of common stock outstanding
Earnings per share on common stock
0%
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Earnings per Share of Common Stock
Name:
Section:
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1.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax 2,100,000$ 2,100,000$ 2,100,000$
Bond interest – – 720,000
Income before income tax
2,100,000$ 2,100,000$ 1,380,000$
Income tax 840,000 840,000 552,000
2.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax 1,050,000$ 1,050,000$ 1,050,000$
Bond interest – – 720,000
Income before income tax
1,050,000$ 1,050,000$ 330,000$
3.
Problem 14-1A
Name:
Solution
Section:
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ON
Score:
Instructions
The principal advantage of Plan 1 is that it involves only the issuance of common stock, which does not
require a periodic interest payment or return of principal, and a payment of preferred dividends is not
required. It is also more attractive to common shareholders than is Plan 2 or 3 if earnings before interest
can be paid. Finally, Plan 3 provides the lowest EPS ($0.04) if earnings before interest and
income tax is $1,050,000.
Plan 2 provides a middle ground in terms of the advantages and disadvantages described in
the preceding paragraphs for Plans 1 and 3.
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Earnings per Share of Common Stock
Earnings per Share of Common Stock
The principal advantage of Plan 1 is that it involves only the issuance of common stock, which does not
require a periodic interest payment or return of principal, and a payment of preferred dividends is not
required. It is also more attractive to common shareholders than is Plan 2 or 3 if earnings before interest
and income tax is $1,050,000. In this case, it has the largest EPS ($0.35). The principal disadvantage of
Plan 1 is that it requires an additional investment by present common shareholders to retain their current
interest in the company. Also, if earnings before interest and income tax is $2,100,000, it offers the
lowest EPS ($0.70) on common stock.
The principal advantage of Plan 3 is that little additional investment would need to be made by common
shareholders for them to retain their current interest in the company. Also, it offers the largest EPS
($1.44) if earnings before interest and income tax is $2,100,000. Its principal disadvantage is that the
bonds carry a fixed annual interest charge and require the payment of principal. It also requires a
dividend payment to preferred stockholders before a common dividend
can be paid. Finally, Plan 3 provides the lowest EPS ($0.04) if earnings before interest and
income tax is $1,050,000.
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1.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax
Bond interest
Income before income tax
Income tax
Net income
Dividends on preferred stock
Earnings available for common stock
Shares of common stock outstanding
Earnings per share on common stock
Score:
Key Code:
Instructions
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Earnings per Share of Common Stock
Name:
Section:
0%
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1.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax 10,000,000$ 10,000,000$ 10,000,000$
Bond interest – – 3,600,000
Income before income tax
10,000,000$ 10,000,000$ 6,400,000$
2.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax 6,000,000$ 6,000,000$ 6,000,000$
Bond interest – – 3,600,000
Income before income tax
6,000,000$ 6,000,000$ 2,400,000$
3.
ON
Score:
Problem 14-1B
Name:
Solution
Section:
Instructions
The principal advantage of Plan 1 is that it involves only the issuance of common stock, which does not
require a periodic interest payment or return of principal, and a payment of preferred dividends is not
required. It is also more attractive to common shareholders than is Plan 2 or 3 if earnings before interest
and income tax is $6,000,000. In this case, it has the largest EPS ($0.90). The principal disadvantage of
can be paid. Finally, Plan 3 provides the lowest EPS ($0.44) if earnings before interest and income
tax is $6,000,000.
Plan 2 provides a middle ground in terms of the advantages and disadvantages described in the
preceding paragraphs for Plans 1 and 3.
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Earnings per Share of Common Stock
Earnings per Share of Common Stock
Answers are entered in the cells with gray backgrounds.
The principal advantage of Plan 1 is that it involves only the issuance of common stock, which does not
require a periodic interest payment or return of principal, and a payment of preferred dividends is not
required. It is also more attractive to common shareholders than is Plan 2 or 3 if earnings before interest
and income tax is $6,000,000. In this case, it has the largest EPS ($0.90). The principal disadvantage of
Plan 1 is that it requires an additional investment by present common shareholders to retain their current
interest in the company. Also, if earnings before interest and income tax is $10,000,000, this plan offers
the lowest EPS ($1.50) on common stock.
The principal advantage of Plan 3 is that little additional investment would need to be made by common
shareholders for them to retain their current interest in the company. Also, it offers the largest EPS
($2.84) if earnings before interest and income tax is $10,000,000. Its principal disadvantage is that the
bonds carry a fixed annual interest charge and require the payment of principal. It also requires a
dividend payment to preferred stockholders before a common dividend
can be paid. Finally, Plan 3 provides the lowest EPS ($0.44) if earnings before interest and income
tax is $6,000,000.
[Key code here]
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1. 2016
July 1
Oct. 1
Dec. 31
Dec. 31
Dec. 31
2017
June 30
Sept. 30
Dec. 31
Dec. 31
Dec. 31
2018
June 30
Sept. 30
Instructions
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Problem 14-4A
Name:
Section:
Score:
0%
Key Code:
2. a. 2016 interest expense:
b. 2017 interest expense:
3. Initial carrying amount of bonds
Discount amortized on December 31, 2016
Discount amortized on June 30, 2017
Discount amortized on December 31, 2017
Carrying amount of bonds, December 31, 2017
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1. 2016
July 1 63,532,267
10,467,733
74,000,000
Oct. 1 200,000
200,000
Cash
Interest Expense
Interest Payable
Income Summary
Interest Expense
Discount on Bonds Payable
2017
June 30 4,331,693
4,070,000
261,693
Sept. 30 28,673
9,000
3,000
40,673
Notes Payable
Interest Expense
Interest Payable
2018
June 30 74,000,000
7,940,961
72,520,000
9,420,961
Cash
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Discount on Bonds Payable
Cash
Problem 14-4A
Name:
Section:
Solution
Loss on Redemption of Bonds
Score:
ON
Key Code:
Instructions
Interest Expense
Discount on Bonds Payable
Notes Payable
Bonds Payable
Cash
Discount on Bonds Payable
Bonds Payable
Interest Payable
Interest Expense
Cash
Notes Payable
Cash
Interest Payable
Income Summary
Interest Expense
Interest Expense
Discount on Bonds Payable
Cash
2.
a. 2016 interest expense: 4,334,693$
3.
Initial carrying amount of bonds 63,532,267$
Discount amortized on December 31, 2016 261,693
[Key code here]
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1. 2016
July 1
Oct. 1
Dec. 31
Dec. 31
Dec. 31
2017
June 30
Sept. 30
Dec. 31
Dec. 31
Dec. 31
2018
June 30
Sept. 30
Score:
0%
Key Code:
Problem 14-4B
Name:
Section:
Instructions
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2.
a. 2016 interest expense:
b. 2017 interest expense:
3.
Initial carrying amount of bonds
Premium amortized on December 31, 2016
Premium amortized on June 30, 2017
Premium amortized on December 31, 2017
Carrying amount of bonds, December 31, 2017
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1. 2016
July 1 62,817,040
55,000,000
7,817,040
Dec. 31 2,093,148
2,093,148
2017
June 30 2,084,148
390,852
2,475,000
Sept. 30 61,342
27,000
9,000
97,342
Dec. 31 7,773
7,773
Dec. 31 2,084,148
390,852
2,475,000
Dec. 31 4,203,069
Interest Payable
Cash
Gain on Redemption of Bonds
Notes Payable
Interest Expense
Premium on Bonds Payable
Income Summary
Interest Expense
Interest Payable
Income Summary
Interest Expense
Interest Expense
Interest Payable
Interest Expense
Cash
Notes Payable
Premium on Bonds Payable
Premium on Bonds Payable
Interest Expense
Cash
Cash
Interest Expense
Cash
Bonds Payable
Problem 14-4B
Name:
Section:
Solution
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Score:
ON
Key Code:
Instructions
Premium on Bonds Payable
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Dec. 31 2,084,148
Interest Expense
Notes Payable
Interest Expense
Interest Payable
Premium on Bonds Payable
Cash
Cash
2.
3.
a. 2016 interest expense: 2,093,148$