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ACC557 Week 6 Chapter 10

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E10-9 Global Airlines is considering two 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 $40 per share. (Cash dividends have not been
paid nor is the payment of any contemplated.)

2. Issue 10%, 10-year bonds at face value for $2,400,000.

It is estimated that the company will earn $800,000 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.

Instructions
Determine the effect on net income and earnings per share for these two methods of
financing.

E10-12 Pueblo Company issued $300,000 of 5-year, 8% bonds at 98 on January 1, 2014. The bonds pay interest twice a year.

(a) (1) Prepare the journal entry to record the issuance of the bonds.

(2) Compute the total cost of borrowing for these bonds.

(b) (1) Prepare the journal entry to record the issuance of the bonds, assuming the bonds were issued at 104.

(2) Compute the total cost of borrowing for these bonds, assuming the bonds were issued at 104.

E10-15 Tucki Co. receives $240,000 when it issues a $240,000, 8%, mortgage note payable to finance the construction of a building at December 31, 2014. The terms provide for semiannual installment payments of $17,660 on June 30 and December 31.

Prepare the journal entries to record the mortgage loan and the first two installment payments.

P10-1A On January 1, 2014, the ledger of Shumway Company contains the following
liability accounts.

Accounts Payable $52,000
Sales Taxes Payable 5,800
Unearned Service Revenue 14,000

During January, the following selected transactions occurred.
Jan. 5 Sold merchandise for cash totaling $22,470, which includes 7% sales taxes.
12 Provided services for customers who had made advance payments of $10,000.
(Credit Service Revenue.)
14 Paid state revenue department for sales taxes collected in December 2013
($5,800).
20 Sold 600 units of a new product on credit at $50 per unit, plus 7% sales tax.
21 Borrowed $14,000 from DeKalb Bank on a 3-month, 8%, $14,000 note.
25 Sold merchandise for cash totaling $12,947, which includes 7% sales taxes.

Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for the outstanding notes payable. (Hint:
Use one-third of a month for the DeKalb Bank note.)
(c) Prepare the current liabilities section of the balance sheet at January 31, 2014. Assume
no change in accounts payable

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