On December 31, 2022, the equity accounts of Book Creations, Inc., contained the following balances: Common stock
Question:
On December 31, 2022, the equity accounts of Book Creations, Inc., contained the following balances:
Common stock ($10 par, 100,000 shares authorized) 50,000 shares issued and outstanding | $500,000 |
Retained earnings | $500,000 |
For the year 2022, the corporation had net income before income taxes of $200,000, income taxes of $42,000, and net income after taxes of $158,000. The corporation’s tax rate is 21 percent.
An expansion of the existing plant at a cost of $500,000 is planned. The corporation’s president, who owns 60 percent of the corporation’s common stock, estimates that the expansion would result in an increased net income of approximately $200,000 before interest and taxes. The financial vice president forecasts that the increase would be only $100,000.
Management is considering two possibilities for financing:
- Issuance of 40,000 additional shares of common stock for $15 per share.
- Issuance of $500,000 face amount, 10-year, 6 percent bonds payable, secured by a mortgage lien on the plant.
Assume that profits from existing operations will remain the same.
Required:
- Assume that the president’s estimate of net income from the new plant is correct. Complete the following two-column table for each plan.
- Assuming the financial vice president’s estimate of earnings is correct, complete the following two-column table for each plan.
(For all the requirements, round all calculations to the nearest dollar.)
Analyze:
Assume the company issued 40,000 shares of common stock and net income before taxes was $350,000. Would shareholders have realized an increase or decrease in earnings per share over fiscal 2022?
Complete this question by entering your answers in the tabs below.
- Analyze
Required 1
Assume that the president’s estimate of net income from the new plant is correct. Complete the following two-column table for each plan.
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- Required 2
Assuming the financial vice president’s estimate of earnings is correct, complete the following two-column table for each plan.
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College Accounting Chapters 1-30
ISBN: 978-1259631115
15th edition
Authors: John Price, M. David Haddock, Michael Farina