Q10.

a. Jenson Co. is considering the following alternative plans for financing the company:

Plan 1 Plan 2

Issue 10% bonds (at face) $2,000,000

Issue $10 common stock $3,000,000 1,000,000

Income tax is estimated at 40% of income.

Determine the earnings per share of common stock under the two alternative financing plans,

assuming income before bond interest and income tax is $1,000,000.

b. Present entries to record the selected transactions described below.

(a) Issued $2,750,000 of 10-year, 8% bonds at 97.

(b) Amortized bond discount for a full year, using the straight-line method.

(c) At the end of the third year, called bonds at 98. The bonds were carried at $2,692,250 at the

time of the redemption.

c. Brubeck Co. issued $10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest

payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize

the entries to record the following selected transactions for the current year:

May 1 Issued the bonds for cash at their face amount.

Nov. 1 Paid the interest on the bonds.

Dec. 31 Recorded accrued interest for two months.