Adriana Lopez created Success Systems on October 1, 2007. The company had been successful, and Adriana plans to expand her business. She believes that an additional $100,000 is needed and is investigating three funding sources.
a. Adriana sister Cicely is willing to invest $100,000 in the business as a common shareholder. Since Adriana currently has $120,000 invested in the business. Cicely’s invest will mean that Adriana will maintain about 55% ownership, and Cicely will have 45% ownership of Success Systems.
b. Adriana’s uncle Marcello is willing to invest $100,000 in the business as a preferred shareholder. Marcello would purchase 1,000 shares of $100 par value, 7% preferred stock.
c. Adriana’s banker is willing to lend her $100,000 on a 7%, 10-year note payable. Adriana would make monthly payments of $1,160.00 per month for 10 years.
1. Prepare the journal entry to reflect the initial $100,000 investment under each of the options (a), (b), (c).
2. Evaluate the three proposals for expansion, providing the pros and cons of each option.
3. Which option do you recommend Adrian adopt? Explain.