Answered: capitalise if the investment is…

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter10: Stockholder's Equity

Section: Chapter Questions

Problem 6MCQ: Ames Corporation repurchases 10,000 shares of its common stock for $12 per share. The shares were...

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You hold a 25% common stock interest in YouOwnIt, a family-owned construction equipment company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of 26,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows: Plan 1.Issue 26,000,000 of 20-year, 8% notes at face amount Plan 2.Issue an additional 550,000 shares of 10 par common stock at 20 per share, and 15,000,000 of 20-year, 8% notes at face amount The balance sheet as of the end of the previous fiscal year is as follows: Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from 2,667,000 in the previous year to 5,000,000 for this year. Your sister has asked you, as the company treasurer, to prepare an analysis of each financing plan. 1. Prepare a table indicating the expected earnings per share on the common stock under each plan. Assume an income tax rate of 40%. Round to the nearest cent. 2. a. Discuss the factors that should be considered in evaluating the two plans. b. Which plan offers greater benefit to the present stockholders? Give reasons for your opinion.
Ames Corporation repurchases 10,000 shares of its common stock for $12 per share. The shares were originally issued at an average price of $10 per share. Later it resells 6,000 of the shares for $15 per share and the remaining 4,000 shares for $17 per share. How much gain or loss should Ames report on its income statement as a result of these transactions? $38.000 gain $0 $20,000 loss $20,000 loss and $38,000 gain

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	401,000
	None of the above
	399,000
	400,000

capitalise if the investment is classified at fair value through OCI