Question 1

A lease is accounted for as an operating lease if the present value of the lease payments is at least 90 percent of the fair value of the leased property.

Accepted Answer

A) True 
 B)False  False

Question 2

Long-term debt generally refers to obligations that extend beyond one year.

Accepted Answer

A) True 
 B)False  True

Question 3

Knox Jewelers issued $1,000,000 of 8% interest bearing debt at the beginning of the year. The company reported net income before interest and taxes of $2,000,000 for the current year. Assuming a 40% tax rate, what is the company's net income for the year?

Accepted Answer

The answer of Knox Jewelers issued $1,000,000 of 8% interest...

Question 4

Match these terms with their definitions.
a. Callable bonds 
f. Mortgage bonds
b. Capital lease 
g. Notes payable
c. Convertible bonds 
h. Operating lease
d. Debenture bonds 
i. Secured bonds
-Give the lender the option to convert the debt into other securities-typically shares of common stock.

Accepted Answer

The answer of Match these terms with their definitions.
a. Callable...

Question 5

-Refer to Korn Business Solutions. Does the note disclosure show evidence of the two types of leases?

Accepted Answer

The answer of 
-Refer to Korn Business Solutions. Does the...

Question 6

Kiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds?

Accepted Answer

A)  Exactly $500,000 because the company would still pay interest at the stated rate.
B)  Less than $500,000 because the 7% yield rate of interest was higher than the stated rate.
C)  More than $500,000 because the 6% stated rate of interest was less than the yield rate.
D)  The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%.

Question 7

Bonds are a popular source of financing because

Accepted Answer

A)  the relative cost of issuing debt is often lower than the cost of issuing equity.
B)  financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.
C)  a company having cash flow problems can postpone payment of interest to bondholders.
D)  the bondholders can always convert their bonds into stock if they choose.

Question 8

When determining the amount of interest to be paid on a bond, which of the following information is necessary?

Accepted Answer

A)  the value of the bonds in one year
B)  the selling price of the bonds
C)  the stated rate of interest on the bonds
D)  the effective rate of interest on the bonds

Question 9

Bonds are generally issued in denominations of $1,000.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following would describe a callable bond?

Accepted Answer

A)  Borrower has the right to pay off the bonds prior to due date.
B)  Borrower has the right to issue more bonds prior to due date of existing bonds.
C)  Borrower has the right to call off the interest payments on the bonds.
D)  Investor has the right to call off the interest payments on the bonds.

Question 11

-Refer to King Cotton Company. What percent of the total liabilities for 2013 and 2012 are long-term liabilities? What implication does this have?

Accepted Answer

The answer of 
-Refer to King Cotton Company. What percent...

Question 12

The effective interest method amortizes premium or discount in a manner that produces a ____________________ rate of interest from period to period.

Accepted Answer

The answer of The effective interest method amortizes premium or...

Question 13

Match these terms with their definitions.
a.Bond
i.Lessor
b.Contract, coupon, stated rate
j.Leverage
c.Discount
k.Long-term debt
d.Effective interest rate method
l.Market rate, yield
e.Face value, par value, principal
m.Maturity
f.Interest amortization
n.Premium
g.Lease
o.Straight-line method
h.Lessee
-The legal owner of a leased asset.

Accepted Answer

The answer of Match these terms with their definitions.
a.Bond
i.Lessor
b.Contract, coupon,...

Question 14

Match these terms with their definitions.
a. Callable bonds 
f. Mortgage bonds
b. Capital lease 
g. Notes payable
c. Convertible bonds 
h. Operating lease
d. Debenture bonds 
i. Secured bonds
-General term that refers to debt that provides collateral (e.g., some asset)for the lender.

Accepted Answer

The answer of Match these terms with their definitions.
a. Callable...

Question 15

Selected data from the comparative financial statements are provided below:
   
-Refer to Kids R Kids Company. The Interest coverage (cash basis)ratio at December 31, 2013, is:

Accepted Answer

The answer of Selected data from the comparative financial statements...

Question 16

A company with operating income of $200,000, cash flow from operating activities of $75,000 and gross profit of $380,000, has interest payments of $25,000. What is the company's Interest Coverage Ratio (Cash Basis)?

Accepted Answer

A)  4 or 4 to 1
B)  3 or 3 to 1
C)  15.2 or 15.2 to 1
D)  2.67 or 2.67 to 1

Question 17

A corporation issued $150,000 of 10-year bonds at the stated rate of 8%, with interest payable semiannually. How much cash will the bond investors receive at the end of the first interest period?

Accepted Answer

A)  $3,000
B)  $6,000
C)  $12,000
D)  $24,000

Question 18

Current assets are $200,000, long term assets are $300,000, current liabilities are $100,000, long-term liabilities are $200,000, paid-in capital is $150,000, and retained earnings total $50,000. What is the debt-to-total-assets ratio?

Accepted Answer

A)  0.4 or .4 to 1
B)  0.6 or .6 to 1
C)  0.2 or .2 to 1
D)  0.9 or .9 to 1

Question 19

Which of the following statements about bond accounting under the effective interest method is correct?

Accepted Answer

A)  The cash interest paid is calculated as the bond face value * the yield rate.
B)  The interest expense is calculated as the carrying value * the yield rate.
C)  The difference between the cash interest paid and the interest expense is added to the carrying value of bonds sold at a premium.
D)  The difference between the interest expense and the interest paid is deducted from the carrying value of bonds sold at a discount.

Question 20

A significant disadvantage of financing with debt rather than stock is the fact that the interest expense on debt is not tax-deductible.

Accepted Answer