Accounting Theory

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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