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Old   #1 (permalink)
 
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Default accounting question help

These a 4 accounting question that were in my test that I didn't get right. Iv'e tried to find the answer but cannot seem to find the good one. Thanks for you help!



1.Explain what will happen to the balance sheet presentation of the carrying value of a bond as it approaches maturity and why. Explain from the perspective of the purpose of accounting.
2.Explain why the accounting cost of financing with debt is not always the same as the true cash cost of financing with debt.
3.Why are mandatory cash constraints considered to be a disadvantage of issuing bonds versus issuing shares?
4.Explain how the cash interest payment on a bond can be less than the interest expense recorded.
NewEra50 is offline   Reply With Quote
Old   #2 (permalink)
 
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Default accounting question help

Go back and read the chapter on bonds.
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more..
Old   #3 (permalink)
 
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Default accounting question help

with the extent of my knowledge, i can only make a few guesses (what i learned in highschool seems to be rather different from this..)

1) a bond is generally thought to last beyond a period of 12 month's till its close to maturity; so perhaps this relates to non-current and current

2) financing your operations with debt, causes gearing and liquidity issues, as well as affects the rate of return on investments. for instance, take out a loan, and you must pay interest, this can affect net profit, as well as your cash flow, whilst also increasing your financial reliance on external funds (i.e. the risk of running your business). however at the same time, this can make your return on investments higher, if successful, due to the difference in capital contributed and profit earnt.

3) not sure about this, we never did much about bonds in Vic.

4)Accural accounting states that not all expenses incurred within a period are paid within that same period. though the business may have incurred the interest expense on that bond, they may not have paid it, due to things like reporting periods.
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Old   #4 (permalink)
 
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Default accounting question help

Numbers 1, 2, and 4 all have to do with issuing bonds at a discount or premium.
Premiums increase the carrying amount of bonds. Discounts decrease the carrying amount. So as bonds approach maturity, bonds sold at a premium will decrease their carrying value until they reach their face value and bonds sold at a discount will increase their carrying value until they reach their face value. When bonds are issued at a premium the cash interest payment is more than the interest expense. When bonds are issued at a discount the cash payment is less. So if bonds are issued at a premium or discount the accounting cost (which is only concerned with the actual expense) will be different than the true cash cost.

3.Why are mandatory cash constraints considered to be a disadvantage of issuing bonds versus issuing shares?
Sometimes when bonds are issued there are provisions made that require the issuing company to maintain a minimum balance of cash. This insures that the interest payments will be made and that the company will have enough cash to pay off the bond when it matures. When this occurs and the company's cash balance falls below the minimum required, the company would have to raise funds by either selling assets, issuing stock, or issuing more debt.
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