Question 1

Why do bonds often include covenants?

Accepted Answer

A)   To reduce information asymmetry.
B)   To reduce moral hazard.
C)   To compensate for value-added services.
D)   To ensure repayment of the bond. B

Question 2

Explain the difference between real-return bonds,convertible bonds and perpetual bonds.

Accepted Answer

inflation-linked (real-return)bonds - Bonds that provide protection against inflation.
convertible bonds - Bonds that allow the holder to exchange or "convert" the bond into other securities in the corporation,usually common shares.
perpetual bonds - Bonds that never mature.

Question 3

Which of the following would be a "non-current liability"?

Accepted Answer

A)   Payment due after 3 years, but the company has violated the debt covenants.
B)   Payment due to a supplier 45 days after year-end for supplies received before year-end.
C)   Payment due to a supplier in 18 months for goods to be received 3 months after year-end.
D)   Payment due after 3 years, on which the debt covenants have been not been violated. D

Question 4

What are "non-current liabilities"?

Accepted Answer

A)   Obligations that are expected to be settled in the next operating cycle of the company.
B)   Obligations that are expected to be settled within the next 12 months.
C)   Obligations that are expected to be settled more than 12 months after the company's year-end.
D)   Obligations that are expected to be settled more than 24 months after the company's year-end.

Question 5

Sarah Braun is the owner of Sarah's Shameless Boutique Corp.(SSBC),a newly incorporated company.Sarah believes that she has a great concept but does not have a lot of money to start the business.Sarah is fairly resourceful,though,and has been able to arrange the following:
1.On July 1,2018,SSBC provides a vendor with a $18,500 non-interest-bearing note due on July 1,2019,in exchange for furniture with a list price of $18,100.Sarah Braun guarantees the debt.
2.On August 1,2018,SSBC buys a photocopier listed for $2,900.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year including interest at 7% with the first payment due on August 1,2019.The loan is secured by a lien on the photocopier.
3.On September 1,2018,SSBC borrows $15,000 from its bank for working capital purposes.The loan,plus interest at 12% per annum,is due on June 30,2019.SSBC grants the bank a security interest in its accounts receivables and inventory.
Unfortunately,SSBC's target audience is a bit more prudish than she anticipated and sales have been slow.While the company was able to retire the bank loan on the due date,it had insufficient cash to pay off the furniture loan.The vendor agrees to accept 2,000 common shares in SSBC in settlement of the obligation.Sarah believed that the shares are worth $20 each,but as this was the first time that SSBC had issued shares to anyone other than Sarah,a fair market price was not yet established.
SSBC's year-end is June 30.The company's banker has suggested that an appropriate market rate for SSBC is 12% per annum for loans that mature in one year or less and 14% for loans with longer maturities.
Required:
a.Prepare journal entries to record:
i.The purchase of the office furniture.
ii.The acquisition of the photocopier.
iii.The receipt of the loan proceeds.
iv.Payments and accruals on June 30,2018.
v.The retirement of the office furnishings loan on July 1,2018.
b.Briefly describe the note disclosure that would be required with respect to the foregoing liabilities.

Accepted Answer

The answer of Sarah Braun is the owner of Sarah's...

Question 6

Which statement is correct about offsetting?

Accepted Answer

A)   Offsetting generally provides decision-useful information for financial statement users.
B)   Offsetting aids in financial statement user's ability to correctly interpret financial results.
C)   Offsetting is generally prohibited under IFRS, unless it is specifically required.
D)   Offsetting is required under IFRS when there is a legally enforceable right of offset.

Question 7

On May 1,2017,SBC INC.buys a photocopier listed for $2,900.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the note be recorded at in the accounting records?

Accepted Answer

A)   $1,853
B)   $1,950
C)   $2,100
D)   $2,900

Question 8

On April 15,2017,Cando Inc.sold $10,000,000 of five-year,3% bonds for $9,972,469. From the proceeds,Cando paid its investment bank a $200,000 sales commission.
Interest is payable semi-annually on April 15 and October 15.What is the effective rate of interest (round to 2 decimal places)?

Accepted Answer

A)   1.53%
B)   1.75 %
C)   3.00%
D)   3.50%

Question 9

Which statement best explains the concept of "leverage"?

Accepted Answer

A)   A measure of the efficiency of the company.
B)   A measure of solvency of the company.
C)   A measure of the company's operations.
D)   A measure of the company's debt paying ability.

Question 10

Non-current debt instruments exchanged for assets are recognized at:

Accepted Answer

A)   book value.
B)   fair value.
C)   cash paid.
D)   cash equivalents paid.

Question 11

Contrast the differences between IFRS and ASPE for financial liabilities using the following table:

Accepted Answer

The answer of Contrast the differences between IFRS and ASPE...

Question 12

Which statement is correct about the derecognition of a matured obligation?

Accepted Answer

A)   There will be a gain on retirement.
B)   There will be a loss on retirement.
C)   There will be no gain or loss on retirement.
D)   There could be either a gain or loss on retirement.

Question 13

Explain the meaning of financial leverage and leveraged buyout.

Accepted Answer

The answer of Explain the meaning of financial leverage and...

Question 14

On May 1,2017,SBC INC.buys a photocopier listed for $2,900.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year including interest at 7%.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the photocopier be recorded at in the accounting records?

Accepted Answer

A)   $1,950
B)   $2,100
C)   $2,900
D)   $2,653

Question 15

On May 1,2017,VeryFine LTD.provides a vendor with a $18,000 non-interest-bearing note due on May 1,2018 in exchange for furniture with a list price of $17,400.At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 8% for loans with longer maturities.

Accepted Answer

A)   $16,415
B)   $16,667
C)   $16,981
D)   $18,000

Question 16

Sally has to decide between the following two options:
1)take out a student loan of $80,000 and study accounting full time for the next three years.The interest on the loan is 3% per year payable annually.The principle to be paid in full after ten years.
"2)study part time and work part time to earn $20,000 per year for the following six years.
Once Sally graduates she estimates that she will earn $35,000 for the first three years and $45,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 6%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"

Accepted Answer

The answer of Sally has to decide between the following...

Question 17

Describe the three steps for derecognition of a financial liability prior to maturity.

Accepted Answer

The answer of Describe the three steps for derecognition of...

Question 18

Based on the characteristics provided below,what kind of bond is being discussed?
1.________ permit the issuing company to redeem before maturity.
2.________ are bonds backed by specific collateral such as a mortgage on real estate.
3.________ are unsecured bonds.
4.________ are bonds that do not pay interest and are sold at a discount and mature at face value.

Accepted Answer

The answer of Based on the characteristics provided below,what kind...

Question 19

What does an "AAA" credit rating mean?

Accepted Answer

The answer of What does an "AAA" credit rating mean?...

Question 20

Offsetting is the practice of showing the net amount of related assets and liabilities on the balance sheet,rather than showing each of the components separately.State and explain the pros and cons of offsetting assets against liabilities.

Accepted Answer

The answer of Offsetting is the practice of showing the...

Exam 2: Non-Current Financial Liabilities