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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 1PEA
Textbook Problem
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Frey Co. is considering the following alternative financing plans:

Chapter 14, Problem 1PEA, Frey Co. is considering the following alternative financing plans: Income tax is estimated at 40% of

Income tax is estimated at 40% of income.

Determine the earnings per share of common stock, assuming that income before bond interest and income tax is $800,000.

To determine

Calculate earnings per share of common stock.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Common stock: It refers to a security issued in a form of certificate and implies the right of ownership of an investor over a portion of company’s earnings and assets.

Earnings per Share: It is a portion of profit that is earned by each common stock.

Formula:

Earnings per share=Net income Preferred dividends Number of common shares outstanding

Determine Earnings per share of common stock.

ParticularsPlan 1Plan 2
Net income before interest on bonds and income tax $800,000$800,000
Less: Interest on bonds$300,000(1)$100,000(2)
Income before income tax$500,000$700,000
Less: Income tax expense $200,000(3)$280,000(4)
Net income$300,000$420,000
Dividends on preferred stock-$300,000(5)
Available for dividends on common stock$300,000$120,000
Number of common stock outstanding÷240,000(6)÷160,000(7)
Earnings per share of common stock$1.25$0.75

Table (1)

Working notes:

(1)

Calculate interest on bonds for plan 1.

Interest expense=Facevalueofbonds×Rate of Interest= $6,000,000×5%=$300,000

(2)

Calculate interest on bonds for plan 2.

Interest expense=Facevalueofbonds×Rate of Interest= $2,000,000×5%=$100,000

 (3)

Calculate income tax expense for plan 1

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Chapter 14 Solutions

Financial Accounting
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