Question 1
There are many financial decisions that face companies today. One of which is how to secure additional monies in order to buy new equipment, construct a new building or improve a manufacturing plant. A means to obtain these funds is by the issuance of a bond. Being the head of your company, what rationale would you rely on to make a decision to issue such a debt instrument? How then would you measure the success of such a decision if you were asked to issue a report to the Board of Directors? Explain you reasoning.
Respond to this...I would explain that issuing bonds would allow the company to borrow money for the long term when the amount of capital needed is too large for one lender to supply. By issuing bonds, the company can divide a large amount of long-term indebtedness into many small investing units and enable more than one lender to participate in the loan (Kieso, Weygandt, & Warfield, 2013). I would also explain that by issuing bonds, the interest on them is deductible on the corporation's income tax return. And by financing these assets with the use of bonds, ownership interest in the corporation does not get diluted by adding more owners, as would be the case if the company issued stock. Issuing bonds ensures any and all gain from the assets purchased will remain with the stockholders and business. The bondholders will only receive the agreed upon interest of the bonds (Accounting Coach, 2016).
References
Accounting Coach. (2016). What is the advantage of issuing bonds instead of stock? Accounting Coach LLC. Retrieved from https://www.accountingcoach.com/blog/bonds-instead-of-stock
Kieso, D. E., Weygandt, J. J., Warfield, T. D. (2013). Intermediate Accounting, 15th Edition. [VitalSource Bookshelf Online]. Retrieved from https://ambassadored.vitalsource.com/#/books/9781118722671/
I would explain that issuing bonds would allow the company to borrow money for the long term when the amount of capital needed is too large for one lender to supply. By issuing bonds, the company can divide a large amount of long-term indebtedness into many small investing units and enable more than one lender to participate in the loan (Kieso, Weygandt, & Warfield, 2013). I would also explain that by issuing bonds, the interest on them is deductible on the corporation's income tax return. And by financing these assets with the use of bonds, ownership interest in the corporation does not get diluted by adding more owners, as would be the case if the company issued stock. Issuing bonds ensures any and all gain from the assets purchased will remain with the stockholders and business. The bondholders will only receive the agreed upon interest of the bonds (Accounting Coach, 2016).
References
Accounting Coach. (2016). What is the advantage of issuing bonds instead of stock? Accounting Coach LLC. Retrieved from https://www.accountingcoach.com/blog/bonds-instead-of-stock
Kieso, D. E., Weygandt, J. J., Warfield, T. D. (2013). Intermediate Accounting, 15th Edition. [VitalSource Bookshelf Online]. Retrieved from https://ambassadored.vitalsource.com/#/books/9781118722671/
Question 2
Assume you are working on a complex consolidation team assigned to apply the equity method of accounting. You have reached an impassable dispute with another team member working on this project relating to the proper way to apply the equity method of accounting.
Why is it important that the matter is resolved? How will this issue affect the financial statements?
Respond to this...A parent may choose one of two basic methods when accounting for its investment in a subsidiary. They can either use the equity method or the cost method. The equity method records as income an ownership percentage of the reported income of the subsidiary, whether or not it was received by the parent. The cost method treats the investment in the subsidiary like a passive investment by recording income only when dividends are declared by the subsidiary (Fischer, 2016, pg 117).
The equity method of accounting for some investments is often criticized. Some question whether it provides helpful information to users, while others note the complexities and inconsistencies it creates when it interacts with other requirements in IFRS , such as goodwill impairment, share based payments and joint arrangements (Sansom, 2014).
Issues like inconsistent goodwill can affect the financial statements can lead to incorrect consolidation, incorrect information to stakeholders and possible wrongful accounting and disclosures.
Fischer, P. M. (2016). Advanced Accounting, 12th Edition. [VitalSource Bookshelf Online]. Retrieved from https://online.vitalsource.com/#/books/9781305981812/
Sansom, M. (2014, June).The Equity Method of Accounting. Retrieved October 18, 2016, from https://www.ifrs.org/Meetings/MeetingDocs/ASAF/2014/May/03A%20Equity%20Method%20of%20Accounting.pdf
Question 3
To prevent fraud by employees, companies must utilize internal controls and security. Many times smaller companies do not have the Resources to implement these and rely on the integrity of its employees. Do you feel that it is effective for a company to rely on the integrity of its employees? Why or why not? Can a company ensure the integrity of its employees? Explain.
Respond to this...In a perfect world companies could rely on the integrity of its employees. But honestly, I don't think we can right now no. You can trust the employees as much as you would like, but in the end it's confidental and important information that they are working with. I think thatwith out controls and security, you can have one bad apple to get into the system and ruin it. And I also think that the systems of the company will need to be protected from the employees and the outside risks. Even small companies can be at risk. I don't think that they would need to be on door locks or anything to bad. But at least logins for computers and regularly updated passwords.