Santana Rey created Business Solutions on October 1, 2011. The company has been

Question

Santana Rey created Business Solutions on October 1, 2011. The company has been successful, and Santana plans to expand her business. She believes that an additional $86,000 is needed and is investigating three funding sources.

A. Santana%u2019s sister Cicely is willing to invest $86,000 in the business as a common shareholder. Since Santana currently has about $129,000 invested in the business, Cicely%u2019s investment will mean that Santana will maintain about 60% ownership, and Cicely will have 40% ownership of Business Solutions.

B. Santana%u2019s uncle Marcello is willing to invest $86,000 in the business as a preferred shareholder. Marcello would purchase 860 shares of $100 par value, 7% preferred stock.

C. Santana%u2019s banker is willing to lend her $86,000 on a 7%, 10-year note payable. She would make monthly payments of $1,000 per month for 10 years.

Required

1. Prepare the journal entry to reflect the initial $86,000 investment under each of the options (a), (b), and (c).

2. Evaluate the three proposals for expansion, providing the pros and cons of each option.

3. Which option do you recommend Santana adopt? Explain.

Explanation / Answer

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