Issuing Debt Instead of New Equity in a Closely Held

question 27

Multiple Choice

Issuing debt instead of new equity in a closely held firm is most apt to cause:

• A)the owner-manager to work less hard and shirk duties.
• B)the owner-manager to consume more perquisites because the cost is passed to the debtholders.
• C)both more shirking and perquisite consumption since the government provides a tax shield on debt.
• D)agency costs to fall as owner-managers do not need to worry about other shareholders.
• E)the owner-manager to reduce shirking and perquisite consumption.

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Definitions:

T-Account

A visual representation of a general ledger account that helps in understanding the effects of transactions on account balances.

Account

A document detailing all dealings related to a specific element of the accounting formula.

Trial Balance

A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit account columns to ensure equality.

Debit And Credit Balance

Accounting terms where debit balances typically exist in asset and expense accounts, and credit balances in liability, equity, and revenue accounts.