Question 1

Calculate the present value of each of the amounts listed below:

Accepted Answer

1.$6,805.80 = $10,000 x 0.68058
2.$4,631.90 = $10,000 x 0.46319
3.$49,587.00 = $60,000 x 0.82645
4.$54,421.80 = $60,000 x 0.90703

Question 2

Tarnisha Smith is pleased with the performance of her business,Out of Africa.She is thinking about borrowing money to expand her business.Before she does that,she wants to learn more about using financial statements to analyze the impact of debt on her business.Explain to Tarnisha what information about liabilities is found in each financial statement.Then explain to Tarnisha how the debt-to-equity is used to evaluate companies.

Accepted Answer

The balance sheet measures assets and how assets are financed,either by creditors (liabilities)or owners (shareholders' equity).Liabilities are divided into current liabilities,which are due in one year or less and long-term liabilities,which are due more than one year from the balance sheet date.Borrowed money has to be repaid with interest.The income statement shows interest expense that has accrued on both current and long-term liabilities.The statement of cash flows will show the amount of cash generated by operating,investing,and financing activities.The amount of cash generated by operating activities can be used to determine the amount of cash available to cover debt payments.Cash paid for interest appears as a decrease in cash from operating activities.The financing activities section can be used to evaluate cash flows received from issuing bonds and stocks,as well as cash flows used for repayment of debts.
The amount of financial leverage can be measured by the debt-to-equity ratio,which is total liabilities divided by total shareholders' equity.The higher the ratio,the greater the amount of leverage a company is using.As long as a company can earn a return on borrowed money that is higher than the cost of borrowing,a company has positive financial leverage.

Question 3

On November 30,2011,Just in Thyme,Inc.issued $100,000 of 20-year,9% bonds at 100.The bonds pay interest semiannually on May 31 and November 30.How much cash will the company pay for interest on May 31,2012,the first interest payment date?

Accepted Answer

A)  $2,000
B)  $8,000
C)  $4,000
D)  $4,120 C

Question 4

Current liabilities are liabilities that ________.

Accepted Answer

A)  must be satisfied within two years
B)  must be paid from revenues
C)  must be of a definite amount
D)  are to be settled within one year

Question 5

Alpha Company has arranged to borrow $30,000 for 8 years at an annual interest rate of 6%.Annual payments of $4,831.08 will be made.When Alpha makes its first payment at the end of the loan's first year:
1.how much of the payment will be interest?
2.how much of the payment will be used to reduce the principal of the loan?

Accepted Answer

The answer of Alpha Company has arranged to borrow $30,000...

Question 6

On January 1,2011,Bondz,Inc.issued $1,000,000 of 10%,10-year bonds when the market rate of interest was 12%.The bonds pay interest QUARTERLY.To calculate the amount of cash that Bondz received,you must use a discount rate of ________.

Accepted Answer

A)  10%
B)  12%
C)  4%
D)  3%

Question 7

On January 1,2011,Ace Electronics borrowed $40,000 on a five-year,7% note.The loan will be repaid in 5 equal installments of $9,756 each year,beginning on December 31,2011.With each successive payment on the note,________ of the payment will be applied to the loan principal.

Accepted Answer

A)  more
B)  the same amount
C)  less
D)  The answer cannot be determined from the information given.

Question 8

Callable bonds give the bondholder the option of exchanging the bond for common stock.

Accepted Answer

A) True 
 B)False

Question 9

Calculate the payment required for each of the loans listed below.Assume that all loan payments are made at the end of the period described.

Accepted Answer

The answer of Calculate the payment required for each of...

Question 10

Indicate with an "X" whether each description results in the reporting of a current liability,long-term liability,or neither on the company's balance sheet.Assume a December 31,2011 yearend.

Accepted Answer

The answer of Indicate with an "X" whether each description...

Question 11

In May,Fish Nets,Inc.sold 8,000 nets with a three-month warranty for $10 each on account.Fish Nets estimates that warranty costs will be approximately $100 on these sales.What effect will the warranty adjusting entry have on Fish Nets' current ratio?

Accepted Answer

A)  It will cause the current ratio to increase.
B)  It will cause the current ratio to decrease.
C)  It will have no effect on the current ratio because the entry will cause the current assets to increase by $100 and the current liabilities to decrease by $100.
D)  It will have no effect on the current ratio because no adjusting entry is made for estimated warranty costs.

Question 12

Doolitte & Daley,Inc.has current assets of $100,000; total assets of $300,000; current liabilities of $80,000; total liabilities of $180,000; and shareholders' equity of $120,000.Calculate the debt-to-equity ratio.

Accepted Answer

A)  125%
B)  60%
C)  40%
D)  150%

Question 13

When a bond sells at less than its face amount,the market rate of interest is ________.

Accepted Answer

A)  equal to the bond's stated rate of interest
B)  greater than the bond's stated rate of interest
C)  less than the bond's stated rate of interest
D)  irrelevant to investors

Question 14

When a bond sells for 101,the bond is selling at ________.

Accepted Answer

A)  a discount
B)  a premium
C)  par
D)  face value

Question 15

Maxine's Equipment Company had $400,000 in total assets,$275,000 in total liabilities,and $125,000 in shareholders' equity.Interest expense for the period was $15,050.Income from operations was $80,000.Calculate the debt-to-equity ratio.Round your answer to the nearest percentage.

Accepted Answer

The answer of Maxine's Equipment Company had $400,000 in total...

Question 16

Companies are required to recognize warranty expense in the period the goods are returned for repairs.

Accepted Answer

A) True 
 B)False

Question 17

On January 1,2011,Nadir Company issued $1,000,000 of 6%,20-year bonds when the market rate of interest was 5%.The bonds pay interest annually on December 31.To calculate the amount of cash that Nadir received,you must find ________.

Accepted Answer

A)  only the present value of $1,000,000
B)  only the present value of an annuity of $60,000
C)  both the present value of $1,000,000 and the present value of an annuity of $50,000
D)  both the present value of $1,000,000 and the present value of an annuity of $60,000

Question 18

Which of following is NOT a step that should be taken to minimize risk associated with long-term debt? A company should ________.

Accepted Answer

A)  conduct a thorough business analysis when a decision is made to borrow money
B)  evaluate the characteristics of the various types of debt
C)  make sure that there is a high probability of positive financial leverage
D)  maximize its debt-to-equity ratio

Question 19

Amortization is the process of ________.

Accepted Answer

A)  increasing a bond discount over the life of the bond
B)  increasing a bond premium over the life of the bond
C)  adjusting the carrying value of the bond over the life of the bond
D)  depreciating tangible long-term assets

Question 20

On January 1,Wok 'n' Roll,Inc.issued $50,000 worth of 8%,20-year bonds for $52,950.What is the amount of the first year's interest payment?

Accepted Answer

A)  $4,236.00
B)  $2,950.00
C)  $4,000.00
D)  $236.00

Exam 7: Accounting for Liabilities