Sunrise Designs Maintains a Credit Line with Ohio River Bank

question 8

Multiple Choice

Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company's dividends in any one year. The 2017 income statement data for the company is as follows:
$\begin{array}{|l|r|}\hline \text { Net sales } & \$ 840,000 \\\hline \text { Less: Cost of goods sold } & 500,000 \\\hline \text { Gross profit } & \$ 340,000 \\\hline \text { Selling and administrative expenses } & 120,000 \\\hline \text { Net operating income } & \$ 220,000 \\\hline \text { Gain on sale of securities } & 24,000 \\\hline \text { Interest expense } & (4000) \\\hline \text { Net income from continuing operations before tax } & \$240,000 \\\hline \text { Less: Income tax } &51.200\\\hline \text { Net income from continuing operations } &\$188,800 \\\hline \text { Disposal of segment (net of tax) } & 22,000 \\\hline \text { Net income before change in accounting principle } & \$210,800\\\hline \text { Income effect due to change in accounting principle } & 52,000 \\\hline\text { Net income }&\$262,800\\\hline\end{array}$
What is the maximum amount of dividends Sunrise can pay if the covenant associated with the credit line is expressed as 20 percent of net income?

• A)$55,000
• B)$60,000
• C)$52,560
• D)$53,700

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Definitions:

Utility Consumption

The enjoyment or satisfaction gained by using a good or service.

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Markets where resources, such as labor, capital, and land, are bought and sold.

Resource Allocation

The process of distributing available resources among various projects or business units to maximize the effectiveness and efficiency of utilization.

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A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price-takers.