If a ﬁrm fails to make the required interest payments on its long-term bonds, it is said to be in:
A) Business failure.
B) Accounting failure.
C) Accounting insolvency.
D) Technical insolvency.

Question

Quizplus · Accepted Answer

If a firm fails to make the required interest payments on its long-term bonds, it is said to be technically insolvent. Technical insolvency occurs when a firm's liabilities exceed its current assets, but it is still able to meet its obligations through other means such as selling assets, raising additional capital or renegotiating terms with creditors. Business failure refers to when a firm is unable to generate sufficient revenue to cover its expenses and eventually ceases operations. Accounting failure refers to when a firm's financial statements do not accurately represent the true financial position of the company. Accounting insolvency refers to when a firm's liabilities exceed its assets, regardless of whether it can still meet its obligations.

If a ﬁRm Fails to Make the Required Interest Payments