A company sells $200,000 in long-term bonds and pays off $200,000 in accounts payable.Which of the following statements is true?

Question

Quizplus · Accepted Answer

Selling long-term bonds increases long-term liabilities, while paying off accounts payable decreases current liabilities. The total liabilities remain the same, so the debt-to-assets ratio does not change. However, since interest expenses will increase due to the new bonds, the times interest earned ratio, which is calculated as earnings before interest and taxes divided by interest expense, will fall because the denominator (interest expense) increases.

A Company Sells $200,000 in Long-Term Bonds and Pays Off