Sunrise Designs Maintains a Credit Line with Ohio River Bank

question 25

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 is expressed as 20 percent of income before change in accounting principle?

• A)$55,000
• B)$60,000
• C)$65,700
• D)$42,160

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Relating to the last phase of the Stone Age, characterized by the development of agriculture and the making of polished stone tools.

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