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Southeast Airlines Bonds

Southeast Airlines is considering tow alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:
1) Issue 60,000 shares of common stock at $45 per share (cash dividends have not been paid nor is the payment of any contemplated)
2) Issue 10% 10 year bonds at par for $2,700,000.

It is estimated that the company will earn $600,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90,000 shares of common stock outstanding prior to the new financing.
Determine the effect on net income and earnings per share of these two methods of financing.

On January 1, Payne Company issued $200,000 10%, 10 year bonds at par. Interest is payable semiannually on July 1 and January 1.
Present journal entries to record the following:
(a) The issuance of the bonds
(b) The payment of interest on July 1 assuming that the interest was not accrued on June 30.
(c) The accrual of interest on December 31.

On January 1, the Hogan Company issued $200,000, 8%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1.
Prepare the journal entries to record the following events:
(a) The issuance of the bonds.
(b) The payment of interest on July 1, assuming no previous accrual of interest.
(c) The accrual of interest on December 1.

Pueblo Company issued $300,000 of 9% 10-year bonds on January 1, 2004 at face value. Interest is payable semiannually on July 1 and January 1.
Prepare the journal entries to record the following events:
(a) the issuance of the bonds
(b) the payment of interest on July 1, assuming no previous accrual of interest.
(c) The accrual of interest on December 31.
(d) The redemption of bonds at maturity, assuming interest for the last interest period has been paid and recorded.

On June 1, 2005 Hopkins Corp issued $1,000,000, 8%, 5-year bonds at face value. The bonds were dated June 1, 2005 and pay interest semiannually on June 1 and December 1 Financial statements are prepared on December 31.
(a) prepare the journal entry to record the issuance of the bonds
(b) prepare the adjusting entry to record the accrual of interest on December 31,2005
(c) show the balance sheet presentation on December 31, 2005
(d) prepare the journal entry to record payment of interest on June 1, 2006, assuming no accrual of interest from January 1, 2006 to June 1, 2006
(e) prepare the journal entry to record payment of interest on December 1, 2006
(f) assume that on December 1, 2006 Hopkins calls the bonds at 101. Record the redemption of the bonds.

Formosa Co sold $400,000 9% 10-year bonds on January 1,2005. The bonds were dated January 1, and interest is paid on January 1 and July 1. The bonds were sold at 105.
(a) prepare the journal entries to record the issuance of the bonds on January 1, 2005
(b) at December 31, 2005 the balance in the Premium on Bonds Payable account is $18,000. Show the balance sheet presentation of accrued interest and the bond liability at December 31, 2005.
(c) On January 1, 2007 when the carrying value of the bonds was $416,000 the company redeemed the bonds at 105. Record the redemption of the bonds assuming that interest for the period has already been paid.

On July 1, 2005 Kingston Satellites issued $3,600,000 face value 9% 10-year bonds at $3,375.680. This price resulted in an effective interest rate of 10% on the bonds. Kingston uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1.
(a) prepare the journal entry to record the issuance of the bonds on July 1, 2005.
(b) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2005.
(c) Prepare the journal entry to record the payment of interest and the amortization of the discount on July 1, 2006 assuming that interest ws not accrued on June 30.
(d) Prepare the journal entry to record the accrual of interest and the amortization of he discount on December 31, 2006
(e) Prepare an amortization table through December 31, 2006(3 interest periods) for this bond issue.

Solution Preview

Southeast Airlines is considering tow alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:
1) Issue 60,000 shares of common stock at $45 per share (cash dividends have not been paid nor is the payment of any contemplated)
2) Issue 10% 10 year bonds at par for $2,700,000.

It is estimated that the company will earn $600,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90,000 shares of common stock outstanding prior to the new financing.
Determine the effect on net income and earnings per share of these two methods of financing.

Revenue 600,000
Interest (bonds case) 270,000
Taxes 180,000
Net income 420,000 150,000

Net income:
(1) No influence
(2) As we can see above, it would reduce it by 270,000.

Earnings per share:
(1) Those would be 420,000/(60,000 + 90,000) = $2.8 (compared to 420,000/90,000 = $4.67)
(2) Those would be 150,000/90,000 = $1.67 (compared to 420,000/90,000 = $4.67)

On January 1, Payne Company issued $200,000 10%, 10 year bonds at par. Interest is payable semiannually on July 1 and January 1.
Present journal entries to record the following:
(a) The issuance of the bonds
Bonds (10%, 10 year) 200,000
Cash 200,000

(b) The payment of interest on July 1 assuming that the interest was not accrued on June 30.
Interest on Bonds paid 10,000
Cash (10,000)

(c) The accrual of interest on December 31.
Accrued Interest on Bonds 20,000
Interest payable 10,000

On January 1, the Hogan Company issued $200,000, 8%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January ...

Solution Summary

This solution answers a variety of questions about the Southeast Airlines Bonds.

$2.19