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Bizhelp
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Category: General
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Experience:  Bachelors degree
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12. Sorenson Co., is considering the following alternative

Customer Question

12.
Sorenson Co., is considering the following alternative plans for financing their company:


Plan I
Plan II

Issue 10% Bonds (at face)
-
$3,000,000

Issue $10 Common Stock
$4,000,000
$1,000,000





Income tax is estimated at 40% of income.



Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

(Points: 5)
Plan 1 $4.00, plan 2 $1.60
Plan 1 $4.00, plan 2 $1.50
Plan 1 $3.00, plan 2 $1.60
Plan 1 $1.50, plan 2 $4.20


13. If bonds are issued at a premium, the stated interest rate is (Points: 5)
higher than the market rate of interest.
lower than the market rate of interest.
too low to attract investors
adjusted to a higher rate of interest


14. Blanton Corporation purchased 17% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the purchase of Worton Corporation common stock?

(Points: 5)
debit Investment in Worton Corporation; credit Cash
debit Cash; credit Dividend Revenue
debit Investment in Worton Corporation; credit Income of Worton Corporation
debit Cash; credit Investment in Worton Corporation


15. When the corporation issuing the bonds has the right to repurchase the bonds prior to the maturity date for a specific price, the bonds are (Points: 5)
convertible bonds
unsecured bonds
debenture bonds
callable bonds


16. The journal entry a company records for the issuance of bonds when the contract rate is less than the market rate would be (Points: 5)
debit Bonds Payable, credit Cash
debit Cash and Discount on Bonds Payable, credit Bonds Payable
debit Cash, credit Premium on Bonds Payable and Bonds Payable
debit Cash, credit Bonds Payable
Submitted: 6 years ago.
Category: General
Expert:  Bizhelp replied 6 years ago.
Hi nifunifa,

The answers are:

12. Plan 1 $1.50, plan 2 $4.20
13. higher than the market rate of interest.
14. debit Investment in Worton Corporation; credit Cash
15. callable bonds
16. debit Cash and Discount on Bonds Payable, credit Bonds Payable

Hope this helps!
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