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:

Purchase Price

The amount of money paid to buy a good, service, or asset; fundamental in calculating the basis for investment or tax purposes.

Capital Loss Deduction

A tax deduction that allows individuals to offset their capital gains with any losses they incurred on investments in a given tax year.

Carryover

Unused tax credits or deductions that can be applied to future tax years to reduce tax liability.

Short-term Loss

A loss realized on the sale or exchange of an asset held for one year or less.