Question

1. United Alliance Inc. needs funds to acquire new equipment and the company decided to raise the funds through issuing bonds or shares. After considering current market situation and company financial position, United Alliance considers On June 30, 2017, the market interest rate is 7%. United Alliance issued $1,000,000 of 8%, 20-year bonds at 110.625. The bonds pay semi-annual interest on June 30 and December 31. United Alliance Inc. amortizes bonds by the effective-interest method. a. Explain the difference between long term liability and equity financing. (10 marks) Ans: b. Record issuance of the bonds on June 30, 2017, the payment of interest at December 31, 2017, and the semi-annual interest payment on June 30, 2018. (20 Marks) I Page 2 of 10 711 words English (Canada) 100% + Give Feedback to Microsoft

Answer 1

Long-term liability are debts or liabilities which the company has taken from another entity or group of individuals and which are required to be repaid by the company
after a period of 12 months. Bond Payable is an example of Long term liabilities as these are issued by the company generally for a period of more than 12 months
and the company has to pay interest on it and also these instruments are not owned by the company or in other words ownership of the company is not diluted.
Equity on the other hand is the money raised by the company by selling or issuing its shares to the general public or any other entity which includes various investors
and MFIs and Anchor investors. When raising money through Equity the company is not required to pay periodic interest rather common shares are issued to the investor.
So the major differences are:In long-term liabilities the issuer has to pay periodic interest but in Equity it is not required
In long-term liabilities the ownership of the issuer remains intact but in Equity the ownership of the company is diluted.
Long-term liability holders will get preferential payment rights over the Equity holders in case the company goes into liquidation
Date	Accounts and explanation	Debit(in $)	Credit(in $)
Jun 30,2017	Cash(10,000*$110.625)	$                   1,106,250
	Bond Payable		$                  1,000,000
	Premium on Bond Payable		$                     106,250
Dec 31,2017	Interest expense($1,106,250*7%*6/12)	$                        38,719
	Premium on Bond Payable	$                          1,281
	Cash($1,000,000*8%*6/12)		$                       40,000
Jun 30,2018	Interest expense[($1,106,250-$1,281)*7%*6/12]	$                        38,674
	Premium on Bond Payable	$                          1,326
	Cash($1,000,000*8%*6/12)		$                       40,000