Exam 15: Non-Current Liabilities

Return on equity is often higher under debt financing because shareholder's equity is proportionately lower than profit.

The debt to total assets is calculated by dividing total assets by total liabilities.

Excerpts from Chung Corporation's Income Statement and Balance Sheet for 2014 are presented below: Instructions a. Calculate the interest coverage ratio. b. Calculate the debt to total assets ratio. c. What do the two ratios tell you?

Term bonds are bonds that mature at a single specified future date.

Bonds that mature at a single specified future date are called

When a bond discount is allocated to interest expense over the life of the bond, this process is called amortizing the discount.

Debt financing will mean the company will pay less corporate income tax.

A $300,000 bond was retired at 98 when the amortized cost of the bond was $296,000. The entry to record the retirement would include a

Which of the following is a disadvantage of issuing bonds instead of common shares?

The current market value of the bond is equal to the future value of all the present cash flows.

From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that

Junk bonds are bonds that

The following is a summarized balance sheet of Falcon Corporation at December 31, 2013. All amounts are in $000's. Falcon requires additional financing of $5,000,000 to finance an expansion of its business. The two choices are: Alternative 1: Issue a 20-year, $5,000,000 5% bond payable at face value. Alternative 2: Issue 250,000 common shares at $20 each. In Falcon's industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon's board of directors is risk adverse. Assume that the financing is made at the beginning of the year. Instructions a. Calculate the debt to total assets ratio under the two proposed financing methods. b. Make a recommendation to Falcon on the better financing alternative and explain your choice.

Use the following exhibit for questions -The contractual interest rate of the Bombardier bonds is

Three plans for financing a $20,000,000 corporation are under consideration by its organizers. The bonds will be issued at their face value and the income tax rate is estimated at 20%. It is estimated that profit before interest and taxes will be $4,000,000. Instructions For each plan, determine the expected profit and the earnings per share. Prior to obtaining financing there are no common shares outstanding.

Asgar Corporation issues a $350,000, 4%, 20-year mortgage note payable on December 31, 2014, to obtain needed financing for the construction of a building addition. The terms provide for semi-annual blended payments of $12,795 on June 30 and December 31. Instructions a. Prepare the journal entries to record the mortgage loan on December 31, 2014, and the first instalment payment. b. Will the amount of principal reduction in the second instalment payment be more or less than with the first instalment payment?

If bonds are issued at a discount, the issuing corporation will repay an amount less than the face amount of the bonds on the maturity date.

Roblin Manufacturing Inc. intends to finance the acquisition of new manufacturing equipment that costs $150,000 by issuing a 5-year, 3.5% note payable. The note would be issued on January 1, 2014. Roblin's year end is December and would require annual payments on December 31. The finance company has given Roblin the choice of making blended payments of $33,222, or making fixed payments of $30,000 plus interest. Instructions a. Assuming the blended payment option is selected; prepare the amortization table for the first two years of the note payable. Record the issue of the note and the December 31, 2014 payment under this alternative. b. Assuming the fixed principal payment option is selected; prepare the amortization table for the first two years of the note payable. Record the December 31, 2014 payment under this alternative.

A gain on redemption is recorded when the cash paid is more than the amortized cost of the bond.

Financial leverage refers to the practice of borrowing at one rate and investing at another.