Advantages and Disadvantages of Communication Technology

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CHAPTER 15
Long-Term Liabilities
ANSWERS TO QUESTIONS
1.

(a) Long-term liabilities are obligations that are expected to be paid after one year. Examples include bonds, long-term notes, and lease obligations.
(b) Bonds are a form of interest-bearing notes payable used by corporations, universities, and governmental agencies.

2.

(a) The major advantages are:
(1) Stockholder control is not affected—bondholders do not have voting rights, so current stockholders retain full control of the company.
(2) Tax savings result—bond interest is deductible for tax purposes; dividends on stock are not. (3) Earnings per share may be higher—although bond interest expense will reduce net income, earnings per share on common stock will often be higher under bond financing because no additional shares of common stock are issued.

(b) The major disadvantages in using bonds are that interest must be paid on a periodic basis and the principal (face value) of the bonds must be paid at maturity.

3.

(a) Secured bonds have specific assets of the issuer pledged as collateral. In contrast, unsecured bonds are issued against the general credit of the borrower. These bonds are called debenture bonds.

(b) Term bonds mature at a single specified future date. In contrast, serial bonds mature in installments.
(c) Registered bonds are issued in the name of the owner. In contrast, bearer (coupon) bonds are not registered. Holders of bearer bonds must send in coupons to receive interest payments. (d) Convertible bonds may be converted into common stock at the bondholders’ option. Callable bonds are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer.

4.

(a) Face value is the amount of principal due at the maturity date. (b) The contractual interest rate is the rate used to determine the amount of cash interest the borrower pays and the investor receives. This rate is also called the stated interest rate because it is the rate stated on the bonds.

(c) A bond indenture is a legal document that sets forth the terms of the bond issue. (d) A bond certificate is a legal document that indicates the name of the issuer, the face value of the bonds, the contractual interest rate and maturity date of the bonds.

5.

The two major obligations incurred by a company when bonds are issued are the interest payments due on a periodic basis and the principal which must be paid at maturity.

6.

Less than. Investors are required to pay more than the face value; therefore, the market interest rate is less than the contractual rate.

7.

$28,000. $800,000 X 7% X 1/2 year = $28,000.

Copyright © 2010 John Wiley & Sons, Inc.

Weygandt, Accounting Principles, 9/e, Solutions Manual

(For Instructor Use Only)

15-1

Questions Chapter 15 (Continued)
*8. $860,000. The balance of the Bonds Payable account minus the balance of the Discount on Bonds Payable account (or plus the balance of the Premium on Bonds Payable account) equals the carrying value of the bonds.

*9. Debits:
Credits:

Bonds Payable (for the face value) and Premium on Bonds Payable (for the unamortized balance).
Cash (for 97% of the face value) and Gain on Bond Redemption (for the difference between the cash paid and the bonds’ carrying value).

*10. A convertible bond permits bondholders to convert it into common stock at the option of the bondholders.
(a) For bondholders, the conversion option gives an opportunity to benefit if the market price of the common stock increases substantially.
(b) For the issuer, convertible bonds usually have a higher selling price and a lower rate of interest than comparable debt securities without the conversion option. *11. No, Tim is not right. Each payment by Tim consists of: (1) interest on the unpaid balance of the loan and (2) a reduction of loan principal. The interest decreases each period while the portion applied to the loan principal increases each period.

*12. (a) A lease...
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