Question 1

Which of the following is an example of off-balance-sheet financing?

Accepted Answer

A)  Leases 
B)  Bonds 
C)  Dividends 
D)  Notes

Question 2

Which of the following statements is not true about trading on the equity?

Accepted Answer

A)  It can become a disadvantage to a corporation. 
B)  It is another phrase for financial leverage. 
C)  It will increase the number of shares of stock owned. 
D)  It will increase the interest a corporation must pay.

Question 3

Deferred income taxes arise when

Accepted Answer

A)  a revenue item is not subject to income taxes. 
B)  there is a discrepancy between financial reporting requirements and income tax filing requirements. 
C)  a corporation is able to obtain an extension on its income tax filing. 
D)  an expense is not deductible for tax purposes.

Question 4

Issuing bonds between interest payment dates will have the effect of decreasing a bond issuance discount or increasing a bond issuance premium.

Accepted Answer

A) True 
 B)False

Question 5

When a bond issue is converted into common stock, total contributed capital is increased by the carrying value of the bonds converted.

Accepted Answer

A) True 
 B)False

Question 6

The convertibility feature of a bond can be exercised by the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 7

When the effective interest method of amortization is used, the amount of bond interest expense for a given period is calculated by multiplying the face interest rate by the bond's carrying value at the beginning of the given period.

Accepted Answer

A) True 
 B)False

Question 8

Under an operating lease, the lessee records both an asset and a liability.

Accepted Answer

A) True 
 B)False

Question 9

The present value of a bond is always less than the face value of the bond.

Accepted Answer

A) True 
 B)False

Question 10

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Accepted Answer

A) True 
 B)False

Question 11

According to the long-term debt note in its annual report, the Modern Journal Company, publisher of the West End Times, Technotes, and other publications, engaged in the following long-term debt transactions in 2009:
1. On April 1, 2009 7, the company issued $50,000,000 of ten-year, 8 1/4 percent notes with semi-annual interest payments on April 1 and October 1 at face value.
2. On October 15, 2009, the company redeemed, prior to maturity dates, all of its outstanding 10 percent notes that had been issued in connection with the acquisition of E-Reporter Newspapers, Inc. The redemption price was $32,500,000 plus accrued interest. The carrying value of the notes on October 15 was $32,500,000 less an unamortized discount of $3,611,500. The semi-annual interest dates were June 15 and December 15.
3. On December 8, 2009, the company issued $50,000,000 of 8 percent notes due on December 15, ten years later, with semi-annual interest payments on June 15 and December 15. The notes were issued at face value plus accrued interest.
(Note: Long-term notes are accounted for in a manner similar to that for bonds. Round answers to nearest dollar)
a. Prepare entries in journal form to record the three transactions described above.
  
b. Prepare the entries on the interest payment dates of October 1 and December 15, 2009, and the year-end adjustment on December 31, 2009.
  
c. What was the total interest expense during 2009 for the three long-term notes issued, assuming that the balance in Unamortized Discount was $3,746,500 at the beginning of the year? Assume the balance of the outstanding notes in transaction 2 above was $32,500,000 at the beginning of the year.

Accepted Answer

The answer of According to the long-term debt note in...

Question 12

Interest on bonds usually is paid annually.

Accepted Answer

A) True 
 B)False

Question 13

In 2007, Horwitz Corporation issued ten-year, 9 percent bonds when the market interest rate was 11 percent. Interest is payable annually. During 2010, the market rate of interest for similar bonds was 12 percent. Using the effective interest method of amortization, what interest rate will be used to calculate interest expense for 2010?

Accepted Answer

A)  12 percent 
B)  9 percent 
C)  6 percent 
D)  11 percent

Question 14

The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that

Accepted Answer

A)  exceeds the amount of cash to be paid for interest for the period. 
B)  is less than the amount of cash to be paid for interest for the period. 
C)  has no predictable relationship with the amount of cash to be paid for interest for the period. 
D)  equals the amount of cash to be paid for interest for the period.

Question 15

The carrying value of a bond issued at a premium is calculated at any given point in time by deducting the balance of the unamortized premium from the bond's face value.

Accepted Answer

A) True 
 B)False

Question 16

The par value of a bond is equal to its face value.

Accepted Answer

A) True 
 B)False

Question 17

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970, the market interest rate at the date of issuance must have been greater than 7 percent.

Accepted Answer

A) True 
 B)False

Question 18

If $112,000 of 12 percent bonds are issued (at face value) one month after the last semi-annual interest date, the entry to record the issue is:

Accepted Answer

The answer of If $112,000 of 12 percent bonds are...

Question 19

When bonds are converted to common stock, what is the basis for recording (valuing) the stock issued?

Accepted Answer

The answer of When bonds are converted to common stock,...

Question 20

Issuing bonds at a discount has the effect of decreasing interest expense below the face amount of interest.

Accepted Answer

A) True 
 B)False

Exam 13: Long Term Liabilities

Which of the following is an example of off-balance-sheet financing?

Which of the following statements is not true about trading on the equity?

Deferred income taxes arise when

Issuing bonds between interest payment dates will have the effect of decreasing a bond issuance discount or increasing a bond issuance premium.

When a bond issue is converted into common stock, total contributed capital is increased by the carrying value of the bonds converted.

The convertibility feature of a bond can be exercised by the issuing corporation.

When the effective interest method of amortization is used, the amount of bond interest expense for a given period is calculated by multiplying the face interest rate by the bond's carrying value at the beginning of the given period.

Under an operating lease, the lessee records both an asset and a liability.

The present value of a bond is always less than the face value of the bond.

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Interest on bonds usually is paid annually.

The amortization of a bond premium will result in reporting an amount of interest expense for an interest period that

The carrying value of a bond issued at a premium is calculated at any given point in time by deducting the balance of the unamortized premium from the bond's face value.

The par value of a bond is equal to its face value.

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970, the market interest rate at the date of issuance must have been greater than 7 percent.

If $112,000 of 12 percent bonds are issued (at face value) one month after the last semi-annual interest date, the entry to record the issue is:

When bonds are converted to common stock, what is the basis for recording (valuing) the stock issued?

Issuing bonds at a discount has the effect of decreasing interest expense below the face amount of interest.