Ownership in XYZ Company is represented by 200,000 shares of outstanding common stock on which the corporation has earned an unsatisfactory average of $0.45 per share during each of the last three years. As a result of the unsatisfactory earnings, the companys management is planning an expansion that will require the investment of an additional $2,000,000 in the business. The $2,000,000 is to be acquired either by selling an additional 200,000 shares of the companys common stock at $10 per share or selling bonds at par for $2,000,000, with an 8% interest rate. Management estimates that the expansion will double the companys before-tax earnings by an additional 25% over that level in the years that follow.

The company's management wants to finance the expansion in a way that will serve the best interests of present stockholders, and they have asked you to determine this for them. Complete the following table, and then give your opinion on which alternative is preferable.

Description	Issue shares	Issue bonds
Income before interest and income tax	1,000,000	1,000,000
Interest expense
Income before income tax
Income tax expense (30%)
Net income
Issued shares
Earnings per share

Question: which alternative is better? Explain.

The following exercise is a chance to practise journalizing the issue of bonds. On April 1, 2021, XYZ Company issued $100,000 of 10-year 10% bonds at face value. Interest is payable semi-annually, on September 1 and March 1. Prepare the journal entries to record the following three events.

a) The issue of bonds on April 1, 2021

Date	Description	Debit	Credit

b) The payment of interest on October 1, assuming interest is not accrued on September 30

Date	Description	Debit	Credit

c) The accrual of interest on March 31

Date	Description	Debit	Credit