Long - Term Liabilities

Question 1

Bonds

Answer 1

Interest bearing notes payable. To obtain large amounts of capital

Question 2

Advantages of Bonds

Answer 2

1) Stockholder control is not affected
2) Tax savings - deductible for tax purposes
3) Earnings per share may be higher

Question 3

Disadvantages of Bonds

Answer 3

Company must pay interest and repay principal at due date

Question 4

Types of Bonds

Answer 4

1) Secured Bonds - bonds secured by a set asset is called a sinking fund bond and bonds secured by real estate are mortgage bonds
2) Unsecured Bonds - Debenture Bonds
3) Term Bonds - due for payment on a date
4) Serial Bonds - mature in installments
5) Registered Bonds - issued in the name of owner
6) Bearer / Coupon Bonds - not registered holder must send in coupons to receive interest
7) Convertible - Can be converted unto common stock
8) Callable Bonds - can retire at a stated dollar prior to maturity

Question 5

Bond Trading

Answer 5

1) Law gives corporation power to issue bonds
2) BOD and stockholder’s approval is needed
3) BOD must state number of bonds authorized =,total stated value, interest rate
4) Face value is amount of principal borrowed which must be paid back
5)Contractual interest is paid semi annually
6) Bonds are quoted ay percentage of face value one bond = $1000
7) Bond interest expense goes in IS and payable goes in BS
8) Principal or face value of a bond is a Long term liability until one year before maturity

Question 6

Entry for issue of bond

Answer 6

DR: Cash
CR: Bonds Payable

Question 7

Entry for Issue of Bond Interest

Answer 7

DR: Interest Expense
CR: Cash/Interest Paybale

Question 8

Entry for Mortgages

Answer 8

DR: Mortgage Expense, Mortgage Payable
CR: Cash