139) Saint Martin Inc. issued $300,000, 12%, 10-year bonds on July 1, 2008. Interest payments dates are January 2 and July 1. The issue price was $293,400. The bonds are convertible into common shares at the rate of 15 common shares for each $1,000 bond. The market price of Saint Martin Inc. common shares has risen steadily over the last two years and on July 1, 2010, half of the bonds are converted into common shares.
a) Compute the balance in the premium or discount account on date of conversion. Saint Martin Inc. uses the straight-line method of amortization.
b) Prepare the entry to convert half of the bonds into common shares.
140) Diteck Corporation is considering two plans for raising $3,000,000 to expand its operations into the west. The first plan involves the sale of 6%, 10-year bonds that could be issued at face value, and the second plan involves the sale of 50,000 common shares at $60 per share. Either alternative would raise $3,000,000. Prior to any new financing, Diteck Corporation has net income of $850,000 and 200,000 common shares outstanding. Management believes the expansion will generate additional income of $360,000 before interest and taxes. The income tax rate is 40%.
a) Calculate the earnings per share assuming:
1) the bonds are issued
2) the common shares are issued
b) Are there any other factors that should be considered in choosing between the alternatives?
b) Plan 1 results in the higher earnings per share. However, there are other considerations that must be taken into account, such as the riskiness of issuing debt with its mandatory requirement to pay interest every year, and the increase in the debt-to-equity ratio, which may limit the company's ability to borrow in the future.