Company a and Company B Are Identical in All Regards

question 38

Multiple Choice

Company A and Company B are identical in all regards except that during Year 1 Company A borrowed $24,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $24,000 from sale of common stock. Company B agreed to pay a $2,400 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of Year 1, and by what amount?

• A)Company A's retained earnings would be higher by $2,400.
• B)Company B's retained earnings would be higher by $1,680.
• C)Company A's retained earnings would be higher by $720.
• D)Both would show the same retained earnings.

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Definitions:

Reductive

Pertaining to or employing reduction; often referring to explanations or methods that simplify complex phenomena by breaking them down into their components.

Centration

A term from cognitive psychology describing a tendency in young children to focus on one aspect of a situation and neglect others.

Symbolic Play

A type of play where children use objects, actions, or ideas to represent other objects, actions, or ideas, reflecting their growing cognitive abilities.

Imagery

The use of visually descriptive or figurative language in writing, or the visual mental representation of objects, scenes, or events.