Adria Lopez created Success Systems on October 1, 2013. The company has been successful, and Adria plans to expand her business. She believes that an additional $ 86,000 is needed and is investigating three funding sources.
a. Adria's sister Cicely is willing to invest $ 86,000 in the business as a common shareholder. Since Adria currently has about $ 129,000 invested in the business, Cicely's investment will mean that Adria will maintain about 60% ownership, and Cicely will have 40% ownership of Success Systems.
b. Adria's uncle Marcello is willing to invest $ 86,000 in the business as a preferred shareholder. Marcello would purchase 860 shares of $ 100 par value, 7% preferred stock.
c. Adria's banker is willing to lend her $ 86,000 on a 7%, 10 year note payable. She would make monthly payments of $ 1,000 per month for 10 years.
Required:
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.