Question 1

A company may retire bonds by:

Accepted Answer

A)  Exercising a call option. 
B)  The holders converting them to stock. 
C)  Purchasing the bonds on the open market. 
D)  Paying them off at maturity. 
E)  All of these. 
A)  Exercising a call option. 
B)  The holders converting them to stock. 
C)  Purchasing the bonds on the open market. 
D)  Paying them off at maturity. 
E)  All of these.

Question 2

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Accepted Answer

A) True 
 B)False

Question 3

On January 1, a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5 annual end-of-year payments of $12,195. The first payment is due on December 31. Prepare the journal entries to record the first and second installment payments.

Accepted Answer

The answer of On January 1, a company borrowed $50,000...

Question 4

The present value of an annuity can be best or easier computed as the sum of the individual future values for each payment.

Accepted Answer

A) True 
 B)False

Question 5

Owners of coupon bonds are not required to pay tax on the interest earned.

Accepted Answer

A) True 
 B)False

Question 6

The carrying value of a long-term note payable:

Accepted Answer

A)  Is computed as the future value of all remaining future payments, using the market rate of interest. 
B)  Is the face value of the long-term note less the total of all future interest payments. 
C)  Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance. 
D)  Is computed as the present value of all remaining interest payments, discounted using the note's rate of interest. 
E)  Decreases each time period the discount on the note is amortized. 
A)  Is computed as the future value of all remaining future payments, using the market rate of interest. 
B)  Is the face value of the long-term note less the total of all future interest payments. 
C)  Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance. 
D)  Is computed as the present value of all remaining interest payments, discounted using the note's rate of interest. 
E)  Decreases each time period the discount on the note is amortized.

Question 7

A bond's par value is not necessarily the same as its market value.

Accepted Answer

A) True 
 B)False

Question 8

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

Accepted Answer

A) True 
 B)False

Question 9

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

Accepted Answer

A) True 
 B)False

Question 10

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Accepted Answer

A) True 
 B)False

Question 11

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using the effective interest method of amortization is:

Accepted Answer

A)  Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00. 
B)  Debit Interest Payable $14,000.00; credit Cash $14,000.00. 
C)  Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00. 
D)  Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00. 
E)  Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00. 
A)  Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00. 
B)  Debit Interest Payable $14,000.00; credit Cash $14,000.00. 
C)  Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00. 
D)  Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00. 
E)  Debit Interest Expense $15,351.72; credit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.

Question 12

A basic present value concept is that cash paid or received in the future is worth less than the same amount of cash today.

Accepted Answer

A) True 
 B)False

Question 13

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance and the premium reduces the interest expense of the bond over its life.

Accepted Answer

A) True 
 B)False

Question 14

A company issues at par 9% bonds with a par value of $100,000 on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash received on July 1 by the bond holder(s) is:

Accepted Answer

A)  $1,500. 
B)  $3,000. 
C)  $4,500. 
D)  $6,000. 
E)  $7,500. 
A)  $1,500. 
B)  $3,000. 
C)  $4,500. 
D)  $6,000. 
E)  $7,500.

Question 15

Callable bonds reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

Accepted Answer

A) True 
 B)False

Question 16

A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is:

Accepted Answer

A)  $0. 
B)  $10,000 gain. 
C)  $10,000 loss. 
D)  $22,000 gain. 
E)  $22,000 loss. 
A)  $0. 
B)  $10,000 gain. 
C)  $10,000 loss. 
D)  $22,000 gain. 
E)  $22,000 loss.

Question 17

Premium on Bonds Payable is an adjunct or accretion liability account.

Accepted Answer

A) True 
 B)False

Question 18

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

A)  Debit Interest Payable $14,000.00; credit Cash $14,000.00. 
B)  Debit Interest Expense $14,000.00; credit Cash $14,000.00. 
C)  Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00. 
D)  Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00. 
E)  Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00. 
A)  Debit Interest Payable $14,000.00; credit Cash $14,000.00. 
B)  Debit Interest Expense $14,000.00; credit Cash $14,000.00. 
C)  Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00. 
D)  Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00. 
E)  Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.

Question 19

Tart Company's most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?

Accepted Answer

A)  Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50. 
B)  Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57. 
C)  Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50. 
D)  Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57. 
E)  Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchangeD. 
A)  Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50. 
B)  Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57. 
C)  Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50. 
D)  Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57. 
E)  Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchangeD.

Question 20

An _______________ is a series of equal payments at equal time intervals.

Accepted Answer

The answer of An _______________ is a series of equal...

Exam 14: Long-Term Liabilities

A company may retire bonds by:

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

On January 1, a company borrowed $50,000 cash by signing a 7% installment note that is to be repaid in 5 annual end-of-year payments of $12,195. The first payment is due on December 31. Prepare the journal entries to record the first and second installment payments.

The present value of an annuity can be best or easier computed as the sum of the individual future values for each payment.

Owners of coupon bonds are not required to pay tax on the interest earned.

The carrying value of a long-term note payable:

A bond's par value is not necessarily the same as its market value.

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

A basic present value concept is that cash paid or received in the future is worth less than the same amount of cash today.

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance and the premium reduces the interest expense of the bond over its life.

A company issues at par 9% bonds with a par value of $100,000 on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash received on July 1 by the bond holder(s) is:

Callable bonds reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

Premium on Bonds Payable is an adjunct or accretion liability account.

An _______________ is a series of equal payments at equal time intervals.

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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