Match each account used by Buttons Inc.

with the appropriate transaction

1.2
2.1
202,038.4615
(4,000*12)+(5,000*13) = 113,000
2.4
3.1
3.2
3.3

  
220,000
Common stock dividend distributable = 480,000
What is the difference while closing accounts in a corporation versus a partnership or sole
proprietorship

Partnerships and sole propritorships close temporary accounts to income summary or capital, whereas
corporations only close accounts to retained earnings.
3.4
100,000 shares outstanding
3.5
4
4.1
XYZ Company

Ownership in XYZ Company is represented by 200 000 shares of outstanding common

stock on which the corporation has earned an unsatisfactory average of $0.45 per share
during each of the last three years. As a result of the unsatisfactory earnings, the
company's management is planning an expansion that will require the investment of an
additional $2 000 000 in the business. The $2 000 000 is to be acquired either by selling
an additional 200 000 shares of the company's common stock at $10 per share or
selling bonds at par for $2 000 000, with an 8% interest rate. Management estimates
that the expansion will double the company's before-tax earnings by an additional 25%
over that level in the years that follow.

The company's management wants to finance the expansion in a way that will serve the
best interests of present stockholders, and they have asked you to determine this for
them. Complete the following table, and then give your opinion on which alternative is
preferable.

Issue shares Issue bonds

Income before interest and income tax $1 000 000 $1 000 000

Interest expense

Income before income tax

Income tax expense (30%)

Net income

Issued shares

Earnings per share

SUGGESTED ANSWER

Issue shares Issue bonds

Income before interest and income tax $1 000 000 $1 000 000

Interest expense 0 160 000 x (2 000 000 x 8%)

Income before income tax 1 000 000 840 000

Income tax expense (30%) 300 000 252 000

Net income 700 000 588 000

Issued shares 400,000 200,000

Earnings per share 1.75 2.94

4.2
4.4