Question 1

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Accepted Answer

A) True 
 B)False

Question 2

The factor for the present value of an annuity for 6 years at 10% is 4.3553.This means that an annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.

Accepted Answer

A) True 
 B)False

Question 3

Saffron Industries 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.

Question 4

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Accepted Answer

A) True 
 B)False

Question 5

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 6

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

Accepted Answer

A) True 
 B)False

Question 7

A bond sells at a discount when the:

Accepted Answer

A) Contract rate is above the market rate. 
B) Contract rate is equal to the market rate. 
C) Contract rate is below the market rate. 
D) Bond has a short-term life. 
E) Bond pays interest only once a year.

Question 8

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 cash...

Question 9

Term bonds mature on one specified date,whereas serial bonds mature at more than one date.

Accepted Answer

A) True 
 B)False

Question 10

Bond market values are expressed as a percent of their par (face)value.

Accepted Answer

A) True 
 B)False

Question 11

Match between columns
                        Premises: The contract between the bond issuer and the bondholders.that identifies the rights and obligations of the parties.
The amount by which the bond issue selling.price exceeds the bond par value.
The rate that borrowers are willing to pay and lenders are willing to accept.
The net amount at which bonds are reported on the balance sheet.
The amount by which the bond par value exceeds the bond issue selling.price
The interest rate specified in the bond indenture.
The ratio of total liabilities to total stockholders' equity.
Bonds that have specific assets of the issuer pledged as collateral.
Bonds that give the issuer an option of retiring them at a stated dollar amount before maturity.
Bonds that require the issuer to set aside assets to pay the debt.

Accepted Answer

The Answer of Market rate and Debt-to-equity ratio and Carrying is...

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

A bond with a par value of $1,000 trading at 101 ½ sells for a premium.

Accepted Answer

A) True 
 B)False

Question 14

A company issued 10-year,9% bonds with a par value of $500,000 when the market rate was 9.5%.The company received $484,087 in cash proceeds.Using the effective interest method,prepare the issuer's journal entry to record the first semiannual interest payment and the amortization of any bond discount or premium.

Accepted Answer

The answer of A company issued 10-year,9% bonds with a...

Question 15

Which of the following accurately describes a debenture?

Accepted Answer

A) A bond with specific assets pledged as collateral. 
B) A type of bond issued in the names and addresses of the bondholders. 
C) A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds. 
D) A type of bond which is not collateralized but backed only by the issuer's general credit standing. 
E) A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Question 16

A company's ability to issue unsecured debt depends on its credit standing.

Accepted Answer

A) True 
 B)False

Question 17

On January 1,a company issued a $500,000,10%,8-year bond payable,and received proceeds of $473,845.Interest is payable each June 30 and December 31.The total interest expense on the bond over its eight-year life is $400,000.

Accepted Answer

A) True 
 B)False

Question 18

Secured bonds:

Accepted Answer

A) Are called debentures. 
B) Have specific assets of the issuing company pledged as collateral. 
C) Are backed by the issuer's bank. 
D) Are subordinated to those of other unsecured liabilities. 
E) Are the same as sinking fund bonds.

Question 19

On January 1 of Year 1,Congo Express Airways issued $3,500,000 of 7%,bonds that pay interest semiannually on January 1 and July 1.The bond issue price is $3,197,389 and 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 $10,087 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.

Question 20

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value for an annuity (series of payments)at 9% for 7 years is 5.0330.The present value of 1 (single sum)for 7 years at 9% is 0.5470.The present value of the loan is:

Accepted Answer

A) $9,000. 
B) $4,923. 
C) $16,453. 
D) $63,000. 
E) $45,297.

Exam 10: Accounting for Long-Term Liabilities

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

The factor for the present value of an annuity for 6 years at 10% is 4.3553.This means that an annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

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 lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

A bond sells at a discount when the:

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.

Term bonds mature on one specified date,whereas serial bonds mature at more than one date.

Bond market values are expressed as a percent of their par (face)value.

Match each of the appropriate definitions with correct term.

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

A bond with a par value of $1,000 trading at 101 ½ sells for a premium.

Which of the following accurately describes a debenture?

A company's ability to issue unsecured debt depends on its credit standing.

On January 1,a company issued a $500,000,10%,8-year bond payable,and received proceeds of $473,845.Interest is payable each June 30 and December 31.The total interest expense on the bond over its eight-year life is $400,000.

Secured bonds: