Accounting Theory
Essay by review • February 9, 2011 • Essay • 296 Words (2 Pages) • 1,536 Views
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,
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