49. Fabulous Corporation plans to raise $10 million cash on January 1, 20D, by i

Question

49. Fabulous Corporation plans to raise $10 million cash on January 1, 20D, by issuing either (not both) bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). The accounting period ends December 31. How would the annual interest amount or annual dividend amount (if paid) affect the amount of net income for 20D? A) Annual net income would be reduced by the annual interest and by the preferred stock dividends B) Annual net income would be reduced by the interest but not by the preferred stock dividends C) Annual net income would not be reduced by the annual interest nor D) Annual net income would be reduced by the preferred dividends but not by the E) None of the above is correct. by the preferred stock dividends. interest

Explanation / Answer

Option - B

This question requires understanding of the term NET INCOME and how it is computed. In the process of determination of NET INCOME we deduct the interest but not the Dividends.

So Net income is reduced by Interest and not by Dividends

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