AuthorTopic: Question on current liability
intj
@2014-08-27 02:48:30
Hi folks,

In study notes, Session 7::Section E::a.current liability, there is this question:

Which of the following item is a current liability:

A: Bonds (for which there is an adequate sinking fund properly classified as a long term investment) due in three months
B: Bonds due in three years
C: Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months
D: Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue

The answer is C. But I don't understand why A and D are incorrect. Anyone care to enlighten?

Thanks,

intj
yekky
@2014-09-19 14:59:58
A is related to Sinking Fund which means that a certain amount of principle is repaid back to the investor through a Trustee. It's not a liability its an investment that the bondholder holds for three additional months before he gets his principle payments as well as certain coupon payments back. Investors dont want principle payments back until maturity unles its an amortizing asset like a home or a car.

B: Bond due in three years again is an investment and the bonds maturity is at year 3 nothing to do with liabilities as such.

C: Retained earnings due in eleven months indicates that the company has been retaining all its earnings till now probably because the bond indenture (contract) says specifically to not make dividend payments till the Bond reaches maturity. In this case if the bond is matured after 11 months than all those retained earnings that the company hadn't paid will be paid off as dividend payemnts

D: pretty obvious its not D..

C is indeed correct

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