2) A corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to raise the money. Under Plan #1, bonds with a contract rate of interest of 6% would be issued. Under Plan #2, 50,000 additional shares of common stock would be issued at $20 per share. The corporation currently has 300,000 shares of stock outstanding, and it expects to earn $700,000 per year before bond interest and income taxes. The net income and return on investment for both plans is shown below:

	Plan #1	Plan #2
Earnings before bond interest and taxes	$ 700,000	$ 700,000
Bond interest expense	(60,000)
Income before taxes.	$ 640,000	$ 700,000
Income taxes	(224,000)	(245,000)
Net income	$ 416,000	$ 455,000
Equity	$8,000,000	$9,000,000
Return on Equity	5.2%	5.06%

1.Comment on the relative effects of each alternative, including when one form of financing is preferred to another.

2.Describe the journal entries required to record the issuance of bonds at par and the payment of bond interest.

3.Describe the journal entries required to record the issuance of bonds at a premium and the payment of bond interest, including any applicable amortization.

4.Describe the journal entries required to record the issuance of bonds at a discount and the payment of bond interest, including any applicable amortization.

5.Explain the amortization of a bond discount. Identify and describe the amortization methods available.

6.How are bond issue prices determined?

7.Explain the amortization of a bond premium. Identify and describe the amortization methods available.

8.What are methods that a company may use to retire its bonds?

9.Describe the recording procedures for the issuance, retirement, and payment of interest for installment notes.