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 these funding sources.
a. Santana's sister Cicely is willing to invest $86,000 in the business as a common shareholder. Since Santana currently had about $129,000 invested in the business, Cicely's investment will mean that Santana will maintain about 60% ownership and Cicely will have 40% ownership of Business Solutions.
b. Santana's Uncle Marcello is willing to invest $86,000 in the business as a preferred stockholder. Marcello would purchase 860 shares of $100 par value, 7% preferred stock.
c. Santana's banker is willing to lend her $86,000 on a 7%, 10-years not payable. She would make monthly payments of $1,000 per month for 10 years.
Questions:
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 did you recommend Santana adopt? Explain.