Question

Forever 21 issues bonds on Jan 1, 2015, at a face value of $100,000. Annual rate of 6 percent payable in cash on December 31. What happens to liabilities and stockholders' equity?

A) Liabilities increase, stockholders' equity decreases
B) Liabilities and stockholders' equity both increase
C) Liabilities decrease, stockholders' equity increases
D) Liabilities and stockholders' equity both decrease

Answer 1

When Forever 21 issues bonds, its liabilities increase and stockholders' equity decreases.

Step-by-step explanation:

When a company issues bonds, it is borrowing money from investors. In this case, Forever 21 is issuing bonds with a face value of $100,000. This means it is borrowing $100,000 from investors. As a result, the liabilities of Forever 21 increase because it now owes this amount to the bondholders. On the other hand, stockholders' equity remains unchanged because issuing bonds does not affect the ownership stake of the existing shareholders.

Therefore, the correct answer is option A) Liabilities increase, stockholders' equity decreases.