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
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The lessor is the owner of the property and the lessee is the renter or tenant.
(b) The two most common types of leases are operating leases and capital leases.
(c) In an operating lease, the property is rented by the lessee and the lessor retains all ownership risks and responsibilities. A capital lease transfers substantially all the benefits and risks of ownership from the lessor to the lessee, so that the lease is in effect a purchase of the property.
*13. This lease would be reported as an operating lease. In an operating lease, each payment is debited to Rent Expense. Neither a leased asset nor a lease liability is capitalized.
*14. In a capital lease agreement, the lessee records the present value of the lease payments as an asset and a liability. Therefore, Rondelli Company would debit Leased Asset-Equipment for
$186,300 and credit Lease Liability for the same amount.
*15. The nature and the amount of each long-term liability should be presented in the balance sheet or in schedules in the accompanying notes to the statements. The notes should also indicate the interest rates, maturity dates, conversion privileges, and assets pledged as collateral.
*16. Laura is probably indicating that since the borrower has the use of the bond proceeds over the term of the bonds, the borrowing rate in each period should be the same. The effective-interest method results in a
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