AICPA Exam CPA-Business 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

Limited Time Offer

25%

Off

Get Premium CPA-Business Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Pamella

11 hours 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.

upvoted 0 times

...