ch 14 - Intermediate Accounting ACC2110 Chapter 14...

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Intermediate Accounting – ACC2110 Chapter 14 Solutions Q14-1 The following are five reasons why a corporation may wish to issue long-term liabilities rather than equity securities: 1. Debt may be the only available source of funds . Many small- and medium-sized companies may appear too risky to attract equity (i.e., capital stock) investments. Debt issued by a company is a less risky investment because interest is required by law to be paid on each interest payment date. In addition, some types of debt are secured by a lien against specific company assets. 2. Debt financing may have a lower cost . Historically, since debt has a lower investment risk than stock, it usually has offered a relatively lower rate of return. Investors in equity securities generally have earned a higher return. In recent years, however, market conditions have changed, and the cost of debt financing has varied so that this advantage is not always as distinct as it once was. 3. Debt financing offers an income tax advantage . Interest payments to debt holders are deductible as interest expense for income tax purposes, whereas dividend payments on equity securities are not. 4. The voting privilege is not shared . Corporate stockholders may not wish to share ownership. Thus, by issuing debt which does not provide voting rights, ownership interests are not diluted. 1. Debt financing offers the opportunity for leverage . Using leverage, the company expects to earn a return greater than the interest it will pay for their use and thereby benefit the stockholders.
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Q14-2 A bond is a type of note in which a company agrees to pay the holder the face value at the maturity date and to pay interest periodically at a specified rate on the face value. The face value is the amount of money that the issuer will pay at maturity. The maturity date is the date on which the issuer of the bond agrees to pay the face value to the holder. The contract rate is the rate at which the issuer of the bond pays interest each period until maturity. A bond certificate is a serially numbered legal document that specifies the face value, the annual interest rate, the maturity date, and other characteristics of the bond issue. A bond indenture
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This note was uploaded on 02/25/2009 for the course ACC 101 taught by Professor Fried during the Spring '09 term at Coastline Community College.

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ch 14 - Intermediate Accounting ACC2110 Chapter 14...

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