VB Ltd.raises $150,000 by issuing a financial instrument that pays interest at a rate of 8% per year to the investor.At the end of the fourth year,the financial instrument is retired for $155,000.If the financial instrument is treated as debt then:
A) The repayment will decrease owners' equity
B) The interest payment decreases retained earnings
C) Retained Earnings is reduced as the interest payment is treated as a dividend distribution
D) Shareholders' equity is increased at issuance

Question

Quizplus · Accepted Answer

As the financial instrument is treated as debt, the interest payment is a liability and therefore reduces retained earnings. The repayment of the instrument does not affect owners' equity or shareholders' equity, and the interest payment is not treated as a dividend distribution.

VB LtdRaises $150,000 by Issuing a Financial Instrument That Pays Interest