AICPA CPA-Business Exam - Topic 3 Question 66 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 66
Topic #: 3

Price owns 2,000 shares of Universal Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paiD. If Universal is dissolved, which of the following statements is correct?

AUniversal will be liable to Price as an unsecured creditor for $10,000.

BUniversal will be liable to Price as a secured creditor for $20,000.

CPrice will have priority over the claims of Universal's bond owners.

DPrice will have priority over the claims of Universal's unsecured judgment creditors.

Show Suggested Answer

Suggested Answer: A

Choice 'a' is correct. 7.0 percent cost of funds from retained earnings.

The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return 'lost' by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.

$7 / $100 = 7%

Choices 'b', 'c', and 'd' are incorrect, per the above Explanation:/calculation.

by Janey at Feb 27, 2023, 07:47 PM

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Ashton

4 months ago

I disagree, secured creditors come first in a dissolution.

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Sarah

4 months ago

Definitely priority over unsecured creditors, right?

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Rosalia

4 months ago

Wait, how can they owe $10,000 if dividends were $5 per share?

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Edmond

4 months ago

I think Universal is still liable as an unsecured creditor.

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Lai

4 months ago

Price is owed $20,000 in unpaid dividends.

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Lezlie

5 months ago

I thought that since the dividends weren't paid, Price might have a stronger claim, but I'm not clear on how that affects the total amount owed in a dissolution scenario.

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Xochitl

5 months ago

I practiced a similar question where preferred stockholders had priority, but I can't recall if it was over secured creditors or just unsecured ones.

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Marge

5 months ago

I'm a bit unsure, but I feel like preferred shareholders usually have priority over unsecured creditors, which might relate to option D.

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Emilio

5 months ago

I think I remember that cumulative preferred stock means the unpaid dividends accumulate, so maybe Price is owed more than just the initial investment?

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Marjory

5 months ago

I'm feeling a bit lost on this one. Can someone explain the differences between these Request class options? I want to make sure I select the right ones.

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Paulina

5 months ago

Hmm, I'm a bit unsure about this one. I know the balance sheet is important, but I can't quite remember how it differs from the other financial statements. I'll have to think this through carefully.

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Vonda

5 months ago

I'm a bit unsure about this one. I remember something about residual risks too—could that apply here or is it something different?

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Isabella

5 months ago

This looks like a tricky one. I'll need to carefully read through the details and think through the different architectural patterns that could be applied.

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Georgeanna

10 months ago

Ah, the joys of corporate finance! I reckon the answer is D. Price will have priority over the claims of Universal's unsecured judgment creditors. Gotta love those preferred shareholders!

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Matthew

10 months ago

Oof, this is a tough one. I'm leaning towards A, but I'm not completely confident. Universal will be liable to Price as an unsecured creditor for $10,000. Sounds about right, doesn't it?

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Sylvia

10 months ago

Haha, this is a tricky one! I bet the answer is B. Universal will be liable to Price as a secured creditor for $20,000. Preferred shareholders are like the VIPs of the company, you know?

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Gianna

8 months ago

I'm not sure about that. I think D might be the correct answer. Price will have priority over the claims of Universal's unsecured judgment creditors.

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Kallie

8 months ago

I disagree, I believe the correct answer is C. Price will have priority over the claims of Universal's bond owners.

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Allene

8 months ago

I think the answer is actually A. Universal will be liable to Price as an unsecured creditor for $10,000.

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Dell

9 months ago

I agree with you, I think the answer is C too. Preferred shareholders usually have priority over bond owners.

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Alline

9 months ago

No way, I'm pretty sure it's C. Price will have priority over the claims of Universal's bond owners.

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Katy

9 months ago

I think the answer is actually A. Universal will be liable to Price as an unsecured creditor for $10,000.

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Isaac

10 months ago

Interesting question. I'm not sure about this one, but I think C might be the right answer. Price should have priority over the bond owners, right?

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Therese

9 months ago

I'm not sure, but A seems like a possible answer. Universal might be liable to Price as an unsecured creditor.

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Cruz

9 months ago

I believe it's actually D. Price will have priority over the unsecured judgment creditors.

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Beatriz

9 months ago

I think C is correct. Price should have priority over the bond owners.

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Pamella

10 months ago

Hmm, I think the correct answer is D. Price will have priority over the claims of Universal's unsecured judgment creditors. Preferred shareholders usually have priority over unsecured creditors in a dissolution scenario.

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