Question 1

The party that has the right to exercise the call option on callable bonds is(are):

Accepted Answer

A)  The bondholders. 
B)  The bond issuer. 
C)  The bond indenture. 
D)  The bond trustee. 
E)  The bond underwriter. 
A)  The bondholders. 
B)  The bond issuer. 
C)  The bond indenture. 
D)  The bond trustee. 
E)  The bond underwriter.

Question 2

A pension plan

Accepted Answer

A)  Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire. 
B)  Can be underfunded if the accumulated benefit obligation is more than the plan assets. 
C)  Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients. 
D)  Can be a defined benefit plan in which future benefits are set, but the employer's contributions vary depending on assumptions about future pension assets and liabilities. 
E)  All of these. 
A)  Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire. 
B)  Can be underfunded if the accumulated benefit obligation is more than the plan assets. 
C)  Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients. 
D)  Can be a defined benefit plan in which future benefits are set, but the employer's contributions vary depending on assumptions about future pension assets and liabilities. 
E)  All of these.

Question 3

Sinking fund bonds:

Accepted Answer

A)  Require the issuer to set aside assets to retire the bonds at maturity. 
B)  Require equal payments of both principal and interest over the life of the bond issue. 
C)  Decline in value over time. 
D)  Are registered bonds. 
E)  Are bearer bonds. 
A)  Require the issuer to set aside assets to retire the bonds at maturity. 
B)  Require equal payments of both principal and interest over the life of the bond issue. 
C)  Decline in value over time. 
D)  Are registered bonds. 
E)  Are bearer bonds.

Question 4

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Accepted Answer

A) True 
 B)False

Question 5

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Accepted Answer

A) True 
 B)False

Question 6

A disadvantage of bonds is:

Accepted Answer

A)  Bonds require payment of periodic interest. 
B)  Bonds require payment of par value at maturity. 
C)  Bonds can decrease return on equity. 
D)  Bond payments can be burdensome when income and cash flow are low. 
E)  All of these. 
A)  Bonds require payment of periodic interest. 
B)  Bonds require payment of par value at maturity. 
C)  Bonds can decrease return on equity. 
D)  Bond payments can be burdensome when income and cash flow are low. 
E)  All of these.

Question 7

____________________ leases are long-term or noncancelable leases by which the lessor transfers substantially all risks and rewards of ownership to the lessee.

Accepted Answer

The answer of ____________________ leases are long-term or noncancelable leases...

Question 8

Bonds that give the issuer an option of retiring them before they mature are:

Accepted Answer

A)  Debentures. 
B)  Serial bonds. 
C)  Sinking fund bonds. 
D)  Registered bonds. 
E)  Callable bonds. 
A)  Debentures. 
B)  Serial bonds. 
C)  Sinking fund bonds. 
D)  Registered bonds. 
E)  Callable bonds.

Question 9

The present value of an annuity factor for 6 years at 10% is 4.3553. This implies that an annuity of six $2,000 payments at 10% would equal $8,710.60.
$2,000 x 4.3553 = $8,711

Accepted Answer

A) True 
 B)False

Question 10

Bonds that mature at different dates with the result that the entire principal amount is repaid gradually over a number of periods are known as:

Accepted Answer

A)  Registered bonds. 
B)  Bearer bonds. 
C)  Callable bonds. 
D)  Sinking fund bonds. 
E)  Serial bonds. 
A)  Registered bonds. 
B)  Bearer bonds. 
C)  Callable bonds. 
D)  Sinking fund bonds. 
E)  Serial bonds.

Question 11

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. The journal entry to record the issuance of the bond is:

Accepted Answer

A)  Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000. 
B)  Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177. 
C)  Debit Bonds Payable $300,000; debit Interest Expense $12,177; credit Cash $312,177. 
D)  Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000. 
E)  Debit Cash $312,177; credit Bonds Payable $312,177. 
A)  Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000. 
B)  Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177. 
C)  Debit Bonds Payable $300,000; debit Interest Expense $12,177; credit Cash $312,177. 
D)  Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000. 
E)  Debit Cash $312,177; credit Bonds Payable $312,177.

Question 12

A company's total liabilities divided by its total stockholders' equity is called the:

Accepted Answer

A)  Equity ratio. 
B)  Return on total assets ratio. 
C)  Pledged assets to secured liabilities ratio. 
D)  Debt-to-equity ratio. 
E)  Times secured liabilities earned ratio. 
A)  Equity ratio. 
B)  Return on total assets ratio. 
C)  Pledged assets to secured liabilities ratio. 
D)  Debt-to-equity ratio. 
E)  Times secured liabilities earned ratio.

Question 13

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.
Interest Expense = (Cash Paid) + (Discount Amortization) = ($500,000 x 10% x 6/12) + ($13,000/16) = $25,812.50

Accepted Answer

A) True 
 B)False

Question 14

The present value of an annuity factor at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.
$15,000 x 6.7101 = $100,651.50

Accepted Answer

A) True 
 B)False

Question 15

The carrying value of a long-term note is computed as the present value of all remaining future payments, discounted using the market rate at the time of issuance.

Accepted Answer

A) True 
 B)False

Question 16

Adidas issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is True?

Accepted Answer

A)  Adidas must pay $200,000 at maturity and no interest payments. 
B)  Adidas must pay $206,948 at maturity and no interest payments. 
C)  Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each. 
D)  Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each. 
E)  Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each. 
A)  Adidas must pay $200,000 at maturity and no interest payments. 
B)  Adidas must pay $206,948 at maturity and no interest payments. 
C)  Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each. 
D)  Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each. 
E)  Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

Question 17

On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $10,000 every six months. The life of these bonds is:

Accepted Answer

A)  15 years. 
B)  30 years. 
C)  26.5 years. 
D)  32 years. 
E)  35 years. 
A)  15 years. 
B)  30 years. 
C)  26.5 years. 
D)  32 years. 
E)  35 years.

Question 18

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Accepted Answer

A) True 
 B)False

Question 19

The contract rate on previously issued bonds changes as the market rate of interest changes.

Accepted Answer

A) True 
 B)False

Question 20

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Accepted Answer

A) True 
 B)False

Exam 14: Long-Term Liabilities

The party that has the right to exercise the call option on callable bonds is(are):

A pension plan

Sinking fund bonds:

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

A disadvantage of bonds is:

____________________ leases are long-term or noncancelable leases by which the lessor transfers substantially all risks and rewards of ownership to the lessee.

Bonds that give the issuer an option of retiring them before they mature are:

The present value of an annuity factor for 6 years at 10% is 4.3553. This implies that an annuity of six $2,000 payments at 10% would equal $8,710.60. $2,000 x 4.3553 = $8,711

Bonds that mature at different dates with the result that the entire principal amount is repaid gradually over a number of periods are known as:

A company's total liabilities divided by its total stockholders' equity is called the:

The present value of an annuity factor at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235. $15,000 x 6.7101 = $100,651.50

The carrying value of a long-term note is computed as the present value of all remaining future payments, discounted using the market rate at the time of issuance.

Adidas issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is True?

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

The contract rate on previously issued bonds changes as the market rate of interest changes.

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Accounting in Business

Analyzing and Recording Transactions

Adjusting Accounts and Preparing Financial Statements

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories and Cost of Sales

Accounting Information Systems

Cash and Internal Controls

Accounting for Receivables

Plant Assets, Natural Resources, and Intangibles

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Accounting for Corporations

Investments and International Operations

Reporting the Statement of Cash Flows

Analysis of Financial Statements

Managerial Accounting Concepts and Principles

Job Order Cost Accounting

Process Cost Accounting

Cost Allocation and Performance Measurement

Cost-Volume-Profit Analysis

Master Budgets and Planning

Flexible Budgets and Standard Costs

Capital Budgeting and Managerial Decisions

Time Value of Money

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