Exercise 9-1 Compare financing alternatives (LO1)

[The following information applies to the questions displayed below.]

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $23 million gaming center:

a.	Issue $23 million of 6% bonds at face amount.
b.	Issue 1 million shares of common stock for $23 per share.

References

Section BreakExercise 9-1 Compare financing alternatives (LO1)

1.

value: 2.50 points

Required information

Exercise 9-1 Part 1

Required:

1.	Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answers in dollars not in millions. Round your "Earnings per Share" to 2 decimal places.)

Hints

References

eBook & Resources

Hint #1

Check my work

2.

value: 2.50 points

Required information

Exercise 9-1 Part 2

2.	Which alternative results in the highest earnings per share?

Issue stock

Issue bonds

Hints

References

eBook & Resources

Hint #1

Brief Exercise 9-13 Interpret a bond amortization schedule (LO4)

Presented below is a partial amortization schedule for Discount Pizza.

(1)	(2)	(3)	(4)	(5)
Period	Cash Paid for Interest	Interest Expense	Increase in Carrying Value	Carrying Value
Issue date				$51,091
1	$1,650	$1,788	$138	51,229
2	1,650	1,793	143	51,372

1. & 2.	Record the bond issue and first interest payment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3.

Interest expense increases each period because the carrying value of the debt issued at a discount increases over time.

	True
	False

References

eBook & Resources

Brief ExerciseDifficulty: Easy

Brief Exercise 9-13 Interpret a bond amortization schedule (LO4)Learning Objective: 09-04 Account for the issuance of bonds.

Brief Exercise 9-14 Interpret a bond amortization schedule (LO4)

Presented below is a partial amortization schedule for Premium Pizza.

(1)	(2)	(3)	(4)	(5)
Period	Cash Paid for Interest	Interest Expense	Decrease in Carrying Value	Carrying Value
Issue date				$55,998
1	$1,785	$1,680	$105	55,893
2	1,785	1,677	108	55,785

1. & 2.	Record the bond issue and first interest payment. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3.

Interest expense decreases each period because the carrying value of the debt issued at a premium decreases over time.

	True
	False

References

eBook & Resources

Brief ExerciseDifficulty: Easy

Brief Exercise 9-14 Interpret a bond amortization schedule (LO4)Learning Objective: 09-04 Account for the issuance of bonds.