Question 1

Explain the differences in the components of interest expense for the bonds sold at par, discount, and at a premium.

Accepted Answer

When a bond is sold at par value, the co

Question 2

Which of the following does not affect the current liabilities section of the balance sheet?

Accepted Answer

A)  Purchase of inventory on credit 
B)  Wages owed to employees but not yet paid 
C)  Insurance bill to be paid next month 
D)  Sale of goods on credit 
E)  A probable legal obligation, due within 12 months 
A)  Purchase of inventory on credit 
B)  Wages owed to employees but not yet paid 
C)  Insurance bill to be paid next month 
D)  Sale of goods on credit 
E)  A probable legal obligation, due within 12 months

Question 3

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Accepted Answer

A) True 
 B)False

Question 4

Accrued liabilities are considered long-term operating liabilities.

Accepted Answer

A) True 
 B)False

Question 5

Which one of the following is not correct?

Accepted Answer

A)  For debt issued at par, its interest expense reported on the income statement equals the cash interest payment. 
B)  For bond repurchases: Net bonds payable = Repurchase payment + Gain (loss) on bond repurchase. 
C)  For debt issued at a discount, interest expense reported on the income statement consists of the following two components: cash interest paid less the amortization of a discount. 
D)  None of the above 
A)  For debt issued at par, its interest expense reported on the income statement equals the cash interest payment. 
B)  For bond repurchases: Net bonds payable = Repurchase payment + Gain (loss) on bond repurchase. 
C)  For debt issued at a discount, interest expense reported on the income statement consists of the following two components: cash interest paid less the amortization of a discount. 
D)  None of the above

Question 6

Renegade Corporation issued $60,000,000 in bonds which mature in 5 years. The bonds pay a 10% semiannual coupon. The current market rate for similar bonds is 8%.
A. At what price should this bond offering sell?
B. Create a table showing the amortized premium or discount the first three periods of the bonds.
C. How much is the book value of the bonds at the end of the first year (2 payments)?

Accepted Answer

Using present value tables:
A. Interest

Question 7

Which of the following corporate debt ratings are listed in an increasing level of risk?

Accepted Answer

A)  AAA, A, BB, C 
B)  A, AAA, BB, C 
C)  BB, C, A, AAA 
D)  C, BB, A, AAA 
A)  AAA, A, BB, C 
B)  A, AAA, BB, C 
C)  BB, C, A, AAA 
D)  C, BB, A, AAA

Question 8

Rural Roads Company has the following values taken from its 2016 annual report:
   A. Calculate Rural Roads Company's times interest earned and debt-to-equity ratios.
B. How are these ratios used in credit ratings?
C. According to Standard & Poor's, what are the 2 types of risk factors considered in credit analysis?

Accepted Answer

A. Times interest earned = $320,000 / $1

Question 9

The following items represent various types of liabilities.
1. A manufacturing company is sued for alleged product liability. The company's attorney does not feel that the suit will result in liability to the company, but a loss is possible. If adversely adjudicated, the liability would be material. 
2. Mr. Gold, Inc. has sold products to Twinkle Jewelers, a retailer, which sold the products to customers. The manufacturer's warranty offers replacement of the product if it is found to be defective within 90 days of the sale to the consumer. Historically, 0.06% of the products are returned for replacement.
3. A customer has filed a lawsuit for a minor amount against Twinkle Jewelers. Twinkle 's attorneys have reviewed the case and have found that many similar cases have never been awarded to the plaintiff. 
Identify if the following independent situations should be (a) recorded in the financial statements, (b) disclosed in a footnote in the financial statements, or (c) neither.

Accepted Answer

1. (b) Disclosed in footnote because thi

Question 10

Accounts payable is a short-term source of non-interest bearing financing.

Accepted Answer

A) True 
 B)False

Question 11

Excessive 'leaning on the trade' by a company can often cause long-term profits.

Accepted Answer

A) True 
 B)False

Question 12

Companies with current maturities of long-term debt are required to report an amortization schedule in their financial statements.

Accepted Answer

A) True 
 B)False

Question 13

Following are the liability and equity sections of the consolidated balance sheet and related notes from Delicious Doughnuts, Inc.'s 2016 annual report (in thousands):
   A. Identify the current liabilities recorded for Delicious Doughnuts as of December 31, 2016.
B. What types of costs might be included in the accrued liabilities?

Accepted Answer

A. Current liabilities for Delicious Dou

Question 14

Which of the following details of a company's long-term liabilities are normally reported in footnote disclosures?

Accepted Answer

A)  Collateral 
B)  Interest rates 
C)  Maturity dates 
D)  All of the above 
A)  Collateral 
B)  Interest rates 
C)  Maturity dates 
D)  All of the above

Question 15

The bond issuing company can repurchase its bond at the bonds' issuing price if the bond indenture has a call provision allowing a call of the bonds.

Accepted Answer

A) True 
 B)False

Question 16

Select the following items with each of the following:
-Current maturities of long-term debt

Accepted Answer

A)  Current operating liability 
B)  Current non-operating liability 
A)  Current operating liability 
B)  Current non-operating liability

Question 17

You are a pension fund manager looking for an investment vehicle that will provide your fund with a reliable stream of income over the next 10 years. You want to find the best yield possible while still conforming to the pension fund covenant of investing in investment grade bonds or better. You are trying to decide between the following investment options for your equity:
A. Diner by the Sea
10 years, 5.5% yield, EBIT Interest coverage ratio = 4.0, EBITDA Interest coverage ratio = 6.0, total debt of $480,000,000 (all of which is long term), total equity of $1,000,000,000, and a return on equity of 8.3
B. Perfect Home Products
10 years, 2.5% yield, EBIT Interest coverage ratio = 22.0, EBITDA Interest coverage ratio = 31.0, total debt of $320,000,000 (all of which is long term), total equity of $10,000,000,000, and a return on equity of 25.0
C. Cell Phone Supplies, Inc.
10 years, 8.5% yield, EBIT Interest coverage ratio = 0.78, EBITDA Interest coverage ratio = 1.3, total debt of $210,000,000, total equity of $320,000,000, and a return on equity of 8.2
Using the table below, discuss each investment option's pros and cons, attempt to determine the grade of each bond, and ultimately make an argument for which bond is the appropriate investment for your pension fund. Note: Bonds rated BB, or lower, are considered to be non-investment grade bonds.

Accepted Answer

A. Diner by the Sea: Diner by the Sea's

Question 18

Security for debt in the form of mortgages on assets is known as covenants.

Accepted Answer

A) True 
 B)False

Question 19

Select the following items with each of the following:
-Rent payable

Accepted Answer

A)  Current operating liability 
B)  Current non-operating liability 
A)  Current operating liability 
B)  Current non-operating liability

Question 20

If Mary's Motor Parts issues $2,300,000 in 6% bonds due in 5 years with semiannual interest payments, how much should it expect to raise if the market return for similar bonds is 8%?

Accepted Answer

Using the present value tables:
Interest

Explain the differences in the components of interest expense for the bonds sold at par, discount, and at a premium.

Which of the following does not affect the current liabilities section of the balance sheet?

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Accrued liabilities are considered long-term operating liabilities.

Which one of the following is not correct?

Which of the following corporate debt ratings are listed in an increasing level of risk?

Accounts payable is a short-term source of non-interest bearing financing.

Excessive 'leaning on the trade' by a company can often cause long-term profits.

Companies with current maturities of long-term debt are required to report an amortization schedule in their financial statements.

Which of the following details of a company's long-term liabilities are normally reported in footnote disclosures?

The bond issuing company can repurchase its bond at the bonds' issuing price if the bond indenture has a call provision allowing a call of the bonds.

Select the following items with each of the following: -Current maturities of long-term debt

Security for debt in the form of mortgages on assets is known as covenants.

Select the following items with each of the following: -Rent payable

If Mary's Motor Parts issues $2,300,000 in 6% bonds due in 5 years with semiannual interest payments, how much should it expect to raise if the market return for similar bonds is 8%?

Introducing Financial Accounting

Constructing Financial Statements

Adjusting Accounts for Financial Statements

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Reporting and Analyzing Revenues and Receivables

Reporting and Analyzing Inventory

Reporting and Analyzing Long-Term Operating Assets

Reporting and Analyzing Leases, Pensions, and Income Taxes

Reporting and Analyzing Stockholders Equity

Reporting and Analyzing Financial Investments

Appendix : Compound Interest and the Time-Value of Money

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Exam 9: Reporting and Analyzing Liabilities

Explain the differences in the components of interest expense for the bonds sold at par, discount, and at a premium.

Which of the following does not affect the current liabilities section of the balance sheet?

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Accrued liabilities are considered long-term operating liabilities.

Which one of the following is not correct?

Which of the following corporate debt ratings are listed in an increasing level of risk?

Accounts payable is a short-term source of non-interest bearing financing.

Excessive 'leaning on the trade' by a company can often cause long-term profits.

Companies with current maturities of long-term debt are required to report an amortization schedule in their financial statements.

Which of the following details of a company's long-term liabilities are normally reported in footnote disclosures?

The bond issuing company can repurchase its bond at the bonds' issuing price if the bond indenture has a call provision allowing a call of the bonds.

Select the following items with each of the following: -Current maturities of long-term debt

Security for debt in the form of mortgages on assets is known as covenants.

Select the following items with each of the following: -Rent payable

If Mary's Motor Parts issues $2,300,000 in 6% bonds due in 5 years with semiannual interest payments, how much should it expect to raise if the market return for similar bonds is 8%?

Introducing Financial Accounting

Constructing Financial Statements

Adjusting Accounts for Financial Statements

Reporting and Analyzing Cash Flows

Analyzing and Interpreting Financial Statements

Reporting and Analyzing Revenues and Receivables

Reporting and Analyzing Inventory

Reporting and Analyzing Long-Term Operating Assets

Reporting and Analyzing Leases, Pensions, and Income Taxes

Reporting and Analyzing Stockholders Equity

Reporting and Analyzing Financial Investments

Appendix : Compound Interest and the Time-Value of Money

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