Unit 2 Individual Project
Presented in Partial Fulfillment
Of the Requirements for the Class
ACG 450 ? Advanced Topics in Accounting
By
Jason T. Rose
AIU Online
24 November 2005
1. Determine the income under each of the following equity theories:
o Proprietary theory
Net Income = Operating margin ? Interest expense
= $300,000 - $80,000
= $220,000
o Entity theory (orthodox view)
Net Income = Revenue ? Operating expense
= $1,000,000 - $700,000
= $300,000
Net Income in this theory also equals the operating margin.
o Entity theory (unorthodox view)
Net Income = Operating margin ? (Interest expense + Dividends preferred stock + Dividends common stock)
= $300,000 ? ($80,000 + $30,000 + $100,000)
= $300,000 - $210,000
= $90,000
o Residual theory
Net Income = Operating margin ? (Interest expense + Dividends preferred stock)
= $300,000 ? ($80,000 + $30,000)
= $300,000 - $110,000
= $190,000
2. Would any of your answers change if the preferred stock is convertible at any time at the ratio of 2 preferred shares for 1 share of common stock?
With the figures provided if there were a 2 for 1 split, then the price of the stock would go from $5/share to $2.50/share, also the outstanding shares would be 40,000 instead of 20,000. The dividends declared on this split would be the same $100,000, although the par value would decrease in half from $500,000 to $250,000. So with that being said, the dividends declared on 6% preferred stock would now be $15,000.
So, to answer the question, yes there would be changes to some of my answers.
The Entity theory (unorthodox view) and the Residual theory would change. The u ...