Exam 11: Notes, Bonds, and Leases

The operating lease method classifies all of the lease payment each period as _____.

The operating lease method is appropriate when the

Loans from commercial banks and other financial institutions often require firms to pledge assets as _____.

Bonds whose indentures contain a provision which gives the issuing company the option to retire portions of the bond issue before maturity if it so desires, but the provision does not require the company to do so are called _____ bonds.

The most common type of corporate bond, except in the railroad and public utility industries, that carries no special collateral and the borrower issues it on the general credit of the business is called a

When the market interest rate exceeds the coupon rate; the market price of the bond

When analyzing leases, the risks of ownership include the risk of interest rate increases, the risk of technological change and other factors that would affect the lessor's ability to lease or sell the asset.

On January 1, Year 1, Fox Co., Inc., issues $100,000 par value, 10% bonds maturing in 10 years to yield 12% per year, compounded semiannually on January 1 and July 1.Use the present value tables. Refer to the Fox Co.Inc.example.What is the bonds payable account (net of any bond discount or premium) at the end of Year 2 to the nearest amount shown?

Upon entering in the lease agreement, operating leases require that the lessee records

A _____ is a financial contract in which the borrower and the lender agree to certain conditions about repayment, operating policies, other borrowing activities while they are outstanding, and other provisions.

The annual report of Sign Corporation for Year 1 reports capital leases requiring payments totaling $228 million over future years, including $58 million payable at the end of Year 2.The interest rate on these obligations is 12 percent and their present value (discounted at 12 percent) at the end of Year 1 was $181 million.The assets financed by capital leases appear on the Year 1 year-end balance sheet at $220 million.Assume no new leases were entered into during Year 2 and that leasehold assets have a remaining useful life of 10 years at the start of Year 2, but no salvage value.Ignore income taxes. Required: a. What would be the total expense for Year 2 for the leasehold assets and the financing thereof? b. What would be the total cash expenditure during Year 2 related to the leasehold assets and the financing thereof? c. What would be the balance sheet amount for leasehold assets at the end of Year 2? d. What would be the balance sheet amount for lease obligations at the end of Year 2?

On January 1, Year 1, Fox Co., Inc., issues $100,000 par value, 10% bonds maturing in 10 years to yield 12% per year, compounded semiannually on January 1 and July 1.Use the present value tables. Refer to the Fox Co., Inc.example.How much are the initial issue proceeds to the nearest amount shown?

On January 1, Year 7, Quan Restaurant is planning to enter as the lessee into the two lease agreements described below.Each lease is noncancelable, and Quan does not receive title to either leased property during or at the end of the lease term.All payments required under these agreements are due on January 1 each year. Lessor Hadowav Inc. Cutter Electronics Type of property Oven Computer Yearly rental (not including executory costs) \ 15,000 \ 4,000 Lease term 10 years 3 years Economic life 15 years 5 years Purchase option None \ 3,000 Renewal option None None Fair market value at inception of lease \ 125,000 \ 10,200 Unguaranteed residual value None \ 2,000 Lessee's incremental borrowing rate 10\% 10\% Executory costs paid by Lessee Lessor Annual executory costs \ 800 \ 500 Present value factor at 10\% (of an annuity due) 6.76 2.74 (CMA adapted, Dec 93 #28) Refer to the Quan Restaurant example.Quan Restaurant should treat the lease agreement with Cutter Electronics as a(n)

Firms typically finance long-term assets, particularly property, plant, and equipment, with long-term borrowing or funds provided directly or indirectly by shareholders.

U.S.GAAP and IFRS provide for which of the following methods of accounting for long-term leases?

_____ of a note or bond at any date subsequent to the initial borrowing equals the present value of the future, or remaining, cash flows discounted at an appropriate interest rate.

The capital lease method is appropriate when the lessee enjoys most of the _____ and bears most of the _____ of ownership.

How are bonds measured at issuance?

_____bonds permit the holder to exchange the bonds for shares of the firm's common stock under certain conditions.