Be.

256
The board of directors of Lauber Corporation are considering two plans for financing the purchase of new plant
equipment. Plan #1 would require the issuance of $5,000,000, 7%, 20-year bonds at face value. Plan #2 would
require the issuance of 200,000 shares of $5 par value common stock that is selling for $25 per share on the open
market. Lauber Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is
expected to be 30%. Assume that income before interest and income taxes is expected to be $600,000 if the new
factory equipment is purchased.
Instructions
Prepare a schedule that shows the expected net income after taxes and the earnings per share on common stock
under each of the plans that the board of directors is considering.

Be. 257
On January 1, 2012, Hannigan Company issued bonds with a face value of $800,000. The bonds carry a stated
interest of 7% payable each January 1.
a.Prepare the journal entry for the issuance assuming the bonds are issued at 97.
b.Prepare the journal entry for the issuance assuming the bonds are issued at 102.

Be. 258
On January 1, 2012, Hauke Corporation issued $800,000, 6%, 10-year bonds at face value. Interest is payable
annually on January 1. Hauke Corporation has a calendar year end.
Instructions

Prepare all entries related to the bond issue for 2012.

 Answer 256
Plan #1 Plan #2

Issue Bonds Issue Stock

Income before interest taxes $ 600,000 $ 600,000

Interest expense $ 350,000
(7% of $ 5,000,000)

Income before taxes $ 250,000 $ 600,000

Income taxes (30%) $ 75,000 $ 180,000
Net income $ 175,000 $ 420,000
divided by Outstanding shares 100,000 300,000
Earnings per share $ 1.75 $ 1.40

Answer 257
S.No Account Title Debit Credit
a Cash $ 776,000 (97 % of $ 800,000)
Discount on Bonds payable $ 24,000 (3% of $ 800,000)
Bonds payable $ 800,000

b Cash $ 816,000
Bonds payable $ 800,000
Premium on Bonds payable $ 16,000 (2% of $ 800,000)

Answer 258
Date Account Title Debit Credit
Jan-01 Cash $ 800,000
Bonds payable $ 800,000

Dec-31 Bond Interest expense $ 48,000

Bond Interest payable $ 48,000
(6% of $ 800,000)