Company A and Company B are identical in all regards except that during 2016 Com

Question

Company A and Company B are identical in all regards except that during 2016 Company A borrowed $35,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $35,000 from sale of common stock. Company B agreed to pay a $3,500 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of 2016, and by what amount?

A. Company B's retained earnings would be higher by $2,450.

B. Company A's retained earnings would be higher by $3,500.

C. Company A's retained earnings would be higher by $1,050.

D. Both would show the same retained earnings.

Explanation / Answer

Answer is C. Company A's retained earnings would be higher by $1,050

It is beacause Company A would save 30% of 3500 tax as interest can be claimed as expenditure. So, saving would be 3500*0.30 = 1050. SO, its retained earning would be more

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.