Student Name: Abdulla Alkhater

Homework Assignment 12
1. Two companies are financed as follows:
X Co Y Co.

Bonds payable, 9% issued at face $5,000,000 $3,000,000

Common stock, $25 par 3,000,000 3,000,000

Income tax is estimated at 40% of income for both companies.

Determine for each company the earnings per share of common stock, assuming that
the income before bond interest and income taxes is $2,280,000 each.

Answer:

X Co. Y Co.
Earnings before interest and taxes $2,280,000 $2,280,000
Deduct interest on bonds $450,000 $270,000
Income before income tax $1,830,000 $2,010,000
Deduct income tax $732,000 $804,000
Net income $1,098,000 $1,206,000
Earnings per share on common stock $9.15 $10.05
 2. On the first day of the fiscal year, a company issues a $1,000,000, 7%, 5-year bond that
pays semiannual interest of $35,000 ($1,000,000 × 7% × 1/2), receiving cash of
$884,171. Journalize the entry to record the issuance of the bonds.

Answer:

Cash 884,171
Discount on Bonds Payable 115,829
Bonds Payable 1,000,000

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 3. On the first day of the fiscal year, a company issues a $500,000, 8%, 10-year bond that
pays semiannual interest of $20,000 ($500,000 × 8% × 1/2), receiving cash of $530,000.
Journalize the entry to record the issuance of the bonds.

Answer:

Cash 530,000
Premium on Bonds Payable 30,000
Bonds Payable 500,000

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 4. A $375,000 bond issue on which there is an unamortized discount of $40,000 is
redeemed for $320,000. Journalize the redemption of the bonds.

Answer:

Bonds Payable 375,000

Gain on Redemption of Bonds 15,000
Discount on Bonds Payable 40,000
Cash 320,000

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 5. On the first day of the current fiscal year, $1,500,000 of 10-year, 8% bonds, with
interest payable semiannually, were sold for $1,225,000. Present entries to record the
following transactions for the current fiscal year:
(a) Issuance of the bonds.
(b) First semiannual interest payment (record as separate entry from discount amortization).
(c) Amortization of bond discount for the year, using the straight-line method of amortization.

Answer:

(a) Cash 1,225,000

Discount on Bonds Payable 275,000
Bonds Payable 1,500,000

(b) Interest Expense 60,000

Interest Payable 60,000

(c) Interest Expense 27,500

Discount on Bonds Payable 27,500