Consider a firm that recently issued bonds. Further, consider that the firm also set up a bond sinking fund. Required:
a. Why would a firm create a long-term liability?
b. Why would a firm set up a bond sinking fund?
c. If a firm paid $10,000 into its bond sinking fund at the end of the year, how would this transaction be journalized?
a. A firm issues bonds to bring funds into the business for investing and/or operating purposes. The firm weighs the cost of capital in determining which form of financing to pursue.
b. A firm would set up a sinking fund to accumulate funds to eventually retire the bonds. The existence of the fund would mitigate the need for a large, lump sum payment when the bonds are due to retire.
c. Debit to bond sinking fund (noncurrent asset) and credit to cash.
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