Question

Santana Rey created Business Solutions on October 1, 2017. The company has been succesful, and Santana plans to expand her business. She believes that an additional $86,000 is needed and is investigating three funding sources.

a. Santana's sister Cicely is willing to invest $86,000 in the business as a comman shareholder. Since Santana currently has about $129,000 invested in the business, Cicely's investment will mean that Santana will maintain about 60% ownership and Cicely will have 40% ownership of Business Solutions.

b. Santana's uncle Marcello is willing to invest $86,000 in the business as a preferred shareholder. Marcello would purchase 860 shares of $100 par value, 7$ preferred stock.

c. Santana's banker is willing to lend her $86,000 on a 7%, 10-year note payable. She would make monthly payments of $1,000 per month for 10 years.

Required:

1. Prepare the journal entry to reflect the initial $86,000 investment under each of the options (a), (b), and (c).

2. Evaluate the three proposals for expansion, providing the pros and cons of each option.

3. Which option do you recommend Santana adopt? Explain.

Answer 1

1)

Sr. No	journal	debit	credit
a)	cash	86000
	To common stock		86000
B)	cash.	86000
	To preferred stock		86000
C)	cash	86000
	To notes payble		86000

2)

a)There is no cost on issunace of shares, no interest obligation and the company may or may not declare The issuance of shares involves dilution of control in the owner ship of business. Ceiley will be paid only 40%of its share from the profit.

b. Issunace of preferred stock involves payment of fixed 7% rate of dividend. Thus an annual cost of (860*7%)$60.2 is involved in issuance of shares. Although diviends is subject to declaration, in case prefrence shares athe owner must be paid both for the current and all prior years.

c. There is no payment of dividend involved in bank loan . However monthly instalment of $1000 along withthereon will have to be paid .Loan repayment period is 10yrs ,hence interest obligation.

3) after evaluating the three proposals, i would recommend 1st proposal since, it doesnt involve 7% payment expense on preferred stock or notes payble.

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