Question 1

The advantages of financial leverage accrue primarily to

Accepted Answer

A)  management. 
B)  stockholders. 
C)  the government. 
D)  creditors.

Question 2

Alby Corporation purchased a warehouse by signing a long-term $800,000 mortgage with monthly payments of $6,200. The mortgage carries an interest rate of 9 percent. Prepare entries in journal form without explanations to record the purchase and the first two monthly payments. Round answers to the nearest dollar.

Accepted Answer

The answer of Alby Corporation purchased a warehouse by signing...

Question 3

On January 1, 2009, Woodvale Corporation issued five-year term bonds with a face value of $700,000. Interest is payable annually on December 31. The bonds were issued for $727,300. The effective interest method of amortization is used. Ryan reported Bond Interest Expense of $65,457 on its income statement for the year ended December 31, 2009. Calculate the effective interest rate for these bonds.

Accepted Answer

The answer of On January 1, 2009, Woodvale Corporation issued...

Question 4

A company with income before income taxes of $97,000, and $20,000 in interest expense, has an interest coverage ratio of

Accepted Answer

A)  5.9 times. 
B)  4.9 times. 
C)  3.8 times. 
D)  6.9 times.

Question 5

Hooper Corporation has bonds outstanding with a face value of $100,000 and a carrying value of $103,000 on December 31, 2010. If the company calls in and retires these bonds on December 31, 2010, for $105,000, the entry to record the retirement will include a

Accepted Answer

A)  debit to Bonds Payable for $103,000. 
B)  credit to Cash for $103,000. 
C)  debit to Loss on Retirement of Bonds for $3,000. 
D)  debit to Loss on Retirement of Bonds for $2,000.

Question 6

On March 1, 2010, Darby Corporation sold 102 of its 9 percent, $1,000 bonds for a price of 96 plus accrued interest. The accrued interest amounted to $1,000. If a balance sheet were to be prepared at the end of the day, March 1, 2010, the carrying value reported for the bonds payable would be

Accepted Answer

A)  $102,000. 
B)  $97,920. 
C)  $98,940. 
D)  $96,900.

Question 7

When bonds are converted to common stock, which of the following could be part of the entry?

Accepted Answer

A)  Credit to Gain on Conversion of Bonds 
B)  Credit to Unamortized Bond Premium 
C)  Credit to Unamortized Bond Discount 
D)  Debit to Common Stock

Question 8

Financial leverage refers to the issuance of stock to raise cash.

Accepted Answer

A) True 
 B)False

Question 9

Serial bonds are bonds that

Accepted Answer

A)  mature on several different dates. 
B)  all have the same maturity date. 
C)  must be secured. 
D)  are also called term bonds.

Question 10

Crowley Corporation purchased a building on January 2 by signing a long-term $600,000 mortgage with monthly payments of $5,500. The mortgage carries an interest rate of 10 percent. The entry to record the mortgage will include a

Accepted Answer

A)  debit to the Mortgage Payable account for $600,000. 
B)  credit to the Cash account for $600,000. 
C)  debit to the Cash account for $600,000. 
D)  credit to the Mortgage Payable account for $600,000.

Question 11

Which of the following is not needed in calculating the value of a bond?

Accepted Answer

A)  Face interest rate 
B)  Market interest rate 
C)  Future value of periodic interest payments 
D)  Present value of face (maturity) amount

Question 12

Valdez Corporation has outstanding $1,500,000 of 10 percent bonds callable at 103. On July 1, a semiannual interest payment date, the unamortized bond premium equaled $60,000. On that date, $900,000 of the bonds were called and retired. Prepare an entry in journal form without explanation to record the retirement of the bonds on July 1.

Accepted Answer

The answer of Valdez Corporation has outstanding $1,500,000 of 10...

Question 13

If bonds are issued at a premium, the face interest rate is

Accepted Answer

A)  lower than the market rate of interest. 
B)  higher than the market rate of interest. 
C)  too low to attract investors. 
D)  adjusted to a higher effective rate of interest.

Question 14

McPherson Corporation has $1,000,000 of 20-year, 9 percent bonds dated October 1, with interest payment dates of September 30 and March 31. The company's fiscal year ends July 31, and it uses the effective interest method to amortize premium or discount.
a. Prepare entries in journal form for November 1, March 31, and July 31, assuming that the bonds were issued at face value plus accrued interest on November 1. Round answers to the nearest dollar and omit explanations.
b. Prepare entries in journal form for October 1, March 31, and July 31, assuming that the bonds were issued at 98 on October 1 to yield an effective interest rate of 9.2 percent. Round answers to the nearest dollar and omit explanations.

Accepted Answer

The answer of McPherson Corporation has $1,000,000 of 20-year, 9...

Exam 13: Long Term Liabilities