Fabulous Corporation plans to raise $500,000 cash on January 1,20A,by issuing either (not both)bonds payable (8% interest rate)or cumulative preferred shares (8% dividend rate).The accounting period ends December 31.How would the annual interest amount or annual dividend amount (if paid)affect the amount of profit for 20A?

Question

Quizplus · Accepted Answer

The annual interest expense would be deducted from the company's income before taxes, thus reducing the profit. However, preferred dividends are not deducted from income before taxes, as they are paid out of after-tax profits. Therefore, annual profit would only be reduced by the interest expense if bonds payable were issued, not by the preferred share dividends.

Fabulous Corporation Plans to Raise $500,000 Cash on January 1,20A,by