Solar Industries develops and produces high-efficiency solar panels. The company

Question

Solar Industries develops and produces high-efficiency solar panels. The company has an outstanding $10,000,000, 30 year, 10% bond issue dated July 1, 2009. The bond issue is due June 30, 2038. Some bond indentures require the corporation issuing the bonds to transfer cash to a special cash fund, called a sinking fund, over the life of the bond. Such funds help assure investors that there will be adequate cash to pay the bonds at their maturity date. The bond indenture requires a bond sinking fund, which has a balance of 1,200,000 as of July 1, 2014. The company is currently experiencing a shortage of funds due to a recent acquisition. Bob Lachgar, the company’s treasurer, is considering using the funds from the bond sinking fund to cover payroll and other bills that are coming due at the end of the month. Bob’s brother-in-law, a trustee of Solar’s sinking fund, has indicated willingness to allow Bob to use the funds from the sinking fund to temporarily meet the company’s cash needs. Discuss whether Bob’s proposal is appropriate. Are there any other ethical issues you see with this situation?

Explanation / Answer

Bobs Proposal to utilise the Sinking fund balance to cover payroll and other bill is inappropriate and at the same time unethical because Sinking fund has been created to meet the repayment of bonds on maturity and has a special purpose of its creation so any temptation and decision to utilise sinking fund balance for payment of payroll is unethical.Theycan meet the shortage of cash through General fund and not sinking fund .Sinking fund should only be utilised for the purpose for which it has been created.

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