Question 1

What is the risk premium for a company that has a yield rate of 6.24% when the risk-free rate is 4.88%?

Accepted Answer

A)  4.88% 
B)  1.36% 
C)  6.24% 
D)  11.12% 
E)  None of the above 
A)  4.88% 
B)  1.36% 
C)  6.24% 
D)  11.12% 
E)  None of the above B

Question 2

What is the difference between the reported gain (loss) on debt repurchase and the economic gain (loss) on the repurchase? How should such gains / losses be analyzed? Why are current values not reflected on a company's balance sheet?

Accepted Answer

GAAP recognizes a gain (loss) on debt repurchase as the carrying amount of the debt less the repurchase price. The gain or loss on repurchase is exactly offset by the present value of the future cash flow implications of the repurchase and as a result, there is no economic gain (loss).
Gains (losses) are nonoperating and transitory and, consequently, will not be repeated in future income statements. For analysis purposes, they have no economic substance.
Current values for debt issues are not reflected on the balance sheet, and hence the income statement, due to the presumption that debt will not be retired prior to maturity and, at maturity, its market value will equal the face amount that will be repaid.

Question 3

On June 30th, one year before maturity, Bava Industries retired $495,000 of 8% bonds at a cost of 96. The bond's had a net book value on June 30th of $457,500. Bond interest is presently paid up to the date of retirement. 
What is the gain or loss on the retirement of these bonds?

Accepted Answer

Gain (loss) on bond repurchase = Net book value of bonds - Repurchase payment
Gain (loss) = $457,500 - (96% of the bond face value) = $457,500 - $475,200 = $(17,700)
Loss = $17,700

Question 4

Compute the accrued interest as of December 31, 2017, on each of the following notes payable:

Accepted Answer

a. $36,000 × 0.08 × 41 days /

Question 5

On December 31st, 2017, Daniels Sportsplex opened for business. The company borrowed $18,000,000 at 8% and signed a 10 year note that is to be repaid in 19 equal semiannual payments of $975,000 on June 30th and December 31st, with a balloon payment at maturity. Use the financial statement effects template below to record the issuance of the note and the payments of the first four installments

Accepted Answer

@#IMG-DLM& (1) Received $18 million cash from loan

Question 6

Which of the following does Moody's not consider in deriving the credit rating of a company?

Accepted Answer

A)  Profitability ratios 
B)  Loan covenants 
C)  Solvency ratios 
D)  Collateral 
E)  None of the above 
A)  Profitability ratios 
B)  Loan covenants 
C)  Solvency ratios 
D)  Collateral 
E)  None of the above

Question 7

Assume that in January 2017, Vivendi announced a €1.2 billion bond issuance. The bonds have a coupon rate of 6.75% payable semiannually. Assume the bonds have been assigned credit ratings of BBB (stable outlook) by Standard and Poor's, Baa2 (stable outlook) by Moody's, and BBB (stable outlook) by Fitch.
Which of the following is not true?

Accepted Answer

A)  The yield on these bonds would have been lower if Standard and Poor's, Moody's, and Fitch had assigned higher credit ratings. 
B)  The periodic interest payment will be €40.50 million. 
C)  The coupon rate on these bonds would have been higher if Standard and Poor's, Moody's, and Fitch had assigned lower credit ratings. 
D)  The periodic interest expense will depend on the bond's yield. 
E)  None of the above 
A)  The yield on these bonds would have been lower if Standard and Poor's, Moody's, and Fitch had assigned higher credit ratings. 
B)  The periodic interest payment will be €40.50 million. 
C)  The coupon rate on these bonds would have been higher if Standard and Poor's, Moody's, and Fitch had assigned lower credit ratings. 
D)  The periodic interest expense will depend on the bond's yield. 
E)  None of the above

Question 8

InterTech Corporation needed financing to build a new manufacturing plant. On June 30th, 2017, InterTech issued $3,450,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30th). The effective interest rate was 8%.
Use the financial statement effects template below to record the bond issue and InterTech's first two interest payments.

Accepted Answer

@#IMG-DLM& (Note: Answers are rounded to the neare

Question 9

Accrued liabilities are obligations for which there is no external transaction.

Accepted Answer

A) True 
 B)False

Question 10

Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.

Accepted Answer

A) True 
 B)False

Question 11

Following is a footnote for Abbott Laboratories 2016 annual report (in millions):
The following is a summary of long-term debt at December 31:
   In November 2016, Abbott issued $15.1 billion of medium and long-term debt to primarily fund the cash portion of the acquisition of St. Jude Medical. Abbott issued $2.85 billion of 2.35% Senior Notes due November 22, 2019; $2.85 billion of 2.90% Senior Notes due November 30, 2021; $1.50 billion of 3.40% Senior Notes due November 30, 2023; $3.00 billion of 3.75% Senior Notes due November 30, 2026; $1.65 billion of 4.75% Senior Notes due November 30, 2036; and $3.25 billion of 4.90% Senior Notes due November 30, 2046. In November 2016, Abbott also entered into interest rate swap contracts totaling $3.0 billion related to the new debt, which have the effect of changing Abbott's obligation from a fixed interest rate to a variable interest rate obligation on the related debt instruments.
Principal payments required on long-term debt outstanding at December 31, 2016 are $3 million in 2017, $2 million in 2018, $3.8 billion in 2019, $1.3 billion in 2020, $2.9 billion in 2021 and $12.9 billion in 2022 and thereafter.
At December 31, 2016, Abbott's long-term debt rating was A+ by Standard & Poor's Corporation and A2 by Moody's Investors Service. In conjunction with the completion of the St. Jude Medical acquisition on January 4, 2017, the ratings were adjusted to BBB by Standard & Poor's Corporation and Baa3 by Moody's Investors Service. Abbott has readily available financial resources, including unused lines of credit of $5.0 billion which expire in 2019 and that support commercial paper borrowing arrangements. Abbott's weighted-average interest rate on short-term borrowings was 0.6% at December 31, 2016 and 0.2% at December 31, 2015 and 2014.
Required: 
a. What proportion of long-term debt will Abbott Labs repay in 2017?
b. How much does the company owe under the line of credit at year end? Why does Abbott Labs discuss this in its debt footnote?
c. How did the acquisition of St. Jude Medical impact Abbott Labs' default risk?

Accepted Answer

a. Abbott Labs will repay 0.0145% of its

Question 12

Heller Company issues $950,000 of 12% bonds that pay interest semiannually and mature in 10 years.
What is the bonds' issue price assuming that the bonds' market interest rate is 10% per year?

Accepted Answer

A)  $ 950,000 
B)  $1,068,391 
C)  $ 626,485 
D)  $1,111,758 
E)  None of the above 
A)  $ 950,000 
B)  $1,068,391 
C)  $ 626,485 
D)  $1,111,758 
E)  None of the above

Question 13

InterTech Corporation needed financing to build a new manufacturing plant. On June 30th, 2017, InterTech issued $4,350,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30th). The effective interest rate was 8%.
What amount in interest expense did InterTech record for the June 30, 2018 payment?

Accepted Answer

A)  $130,500 
B)  $154,654 
C)  $174,000 
D)  $157,671 
E)  None of the above 
A)  $130,500 
B)  $154,654 
C)  $174,000 
D)  $157,671 
E)  None of the above

Question 14

The table below shows financial ratios that Moody's uses to assess risk for corporate debt. For each ratio, indicate whether financial risk increases or decreases when the ratio is higher.

Accepted Answer

The answer of The table below shows financial ratios that...

Question 15

Higher credit-rated borrowers receive lower interest rates than lower credit-rated borrowers, but the differences are typically not significant.

Accepted Answer

A) True 
 B)False

Question 16

Chang, Inc. issued a 3-month note in the amount of $360,000 on 12/01/17 with an annual rate of 5%. What amount of interest has accrued as of 12/31/17?

Accepted Answer

A)  $4,438 
B)  $1,500 
C)  $ 950 
D)  $4,500 
E)  $1,479 
A)  $4,438 
B)  $1,500 
C)  $ 950 
D)  $4,500 
E)  $1,479

Question 17

On July 1, 2017, Leahy Corporation took out a short-term loan of $45,000 to be repaid in one year. The annual interest rate is 4% with no interest payments due until the loan is repaid. How much interest should Leahy accrue by year-end December 31, 2017? How should it be recorded in the financial statements?

Accepted Answer

Interest expense = $45,000 × 4% × (6/12)

Question 18

The market rate of interest is equal to the risk-free rate plus a risk premium.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following would not require the company to record an accrual on the balance sheet?

Accepted Answer

A)  The company owes $43,000 in wages to its employees for the previous two weeks. 
B)  Interest will be paid when a note payable matures in the following accounting period. 
C)  Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. 
D)  The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. 
E)  None of the above 
A)  The company owes $43,000 in wages to its employees for the previous two weeks. 
B)  Interest will be paid when a note payable matures in the following accounting period. 
C)  Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. 
D)  The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. 
E)  None of the above

Question 20

Walter Company issues $750,000 of 12% bonds that pay interest semiannually and mature in 10 years. Compute the bonds' issue price assuming that the bonds' market interest rate is:
a. 10% per year compounded semiannually
b. 14% per year compounded semiannually

Accepted Answer

a. Using a financial calculato

What is the risk premium for a company that has a yield rate of 6.24% when the risk-free rate is 4.88%?

What is the difference between the reported gain (loss) on debt repurchase and the economic gain (loss) on the repurchase? How should such gains / losses be analyzed? Why are current values not reflected on a company's balance sheet?

On June 30th, one year before maturity, Bava Industries retired $495,000 of 8% bonds at a cost of 96. The bond's had a net book value on June 30th of $457,500. Bond interest is presently paid up to the date of retirement. What is the gain or loss on the retirement of these bonds?

Compute the accrued interest as of December 31, 2017, on each of the following notes payable:

Which of the following does Moody's not consider in deriving the credit rating of a company?

Accrued liabilities are obligations for which there is no external transaction.

Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.

Heller Company issues $950,000 of 12% bonds that pay interest semiannually and mature in 10 years. What is the bonds' issue price assuming that the bonds' market interest rate is 10% per year?

The table below shows financial ratios that Moody's uses to assess risk for corporate debt. For each ratio, indicate whether financial risk increases or decreases when the ratio is higher.

Higher credit-rated borrowers receive lower interest rates than lower credit-rated borrowers, but the differences are typically not significant.

Chang, Inc. issued a 3-month note in the amount of $360,000 on 12/01/17 with an annual rate of 5%. What amount of interest has accrued as of 12/31/17?

The market rate of interest is equal to the risk-free rate plus a risk premium.

Which of the following would not require the company to record an accrual on the balance sheet?

Walter Company issues $750,000 of 12% bonds that pay interest semiannually and mature in 10 years. Compute the bonds' issue price assuming that the bonds' market interest rate is: a. 10% per year compounded semiannually b. 14% per year compounded semiannually

Financial Accounting for MBAS

Introducing Financial Statements

Transactions, Adjustments, and Financial Statements

Analyzing and Interpreting Financial Statements

Revenues, Receivables, and Operating Expenses

Inventory, Accounts Payable, and Long-Term Assets

Stock Transactions, Dividends, and EPS

Intercorporate Investments

Leases, Pensions, and Income Taxes

Cash Flows

Forecasting Financial Statements

Using Financial Statements for Valuation

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Exam 7: Current Liabilities and Long-Term Liabilities

What is the risk premium for a company that has a yield rate of 6.24% when the risk-free rate is 4.88%?

What is the difference between the reported gain (loss) on debt repurchase and the economic gain (loss) on the repurchase? How should such gains / losses be analyzed? Why are current values not reflected on a company's balance sheet?

On June 30th, one year before maturity, Bava Industries retired $495,000 of 8% bonds at a cost of 96. The bond's had a net book value on June 30th of $457,500. Bond interest is presently paid up to the date of retirement. What is the gain or loss on the retirement of these bonds?

Compute the accrued interest as of December 31, 2017, on each of the following notes payable:

Which of the following does Moody's not consider in deriving the credit rating of a company?

Accrued liabilities are obligations for which there is no external transaction.

Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.

Heller Company issues $950,000 of 12% bonds that pay interest semiannually and mature in 10 years. What is the bonds' issue price assuming that the bonds' market interest rate is 10% per year?

The table below shows financial ratios that Moody's uses to assess risk for corporate debt. For each ratio, indicate whether financial risk increases or decreases when the ratio is higher.

Higher credit-rated borrowers receive lower interest rates than lower credit-rated borrowers, but the differences are typically not significant.

Chang, Inc. issued a 3-month note in the amount of $360,000 on 12/01/17 with an annual rate of 5%. What amount of interest has accrued as of 12/31/17?

The market rate of interest is equal to the risk-free rate plus a risk premium.

Which of the following would not require the company to record an accrual on the balance sheet?

Walter Company issues $750,000 of 12% bonds that pay interest semiannually and mature in 10 years. Compute the bonds' issue price assuming that the bonds' market interest rate is: a. 10% per year compounded semiannually b. 14% per year compounded semiannually

Financial Accounting for MBAS

Introducing Financial Statements

Transactions, Adjustments, and Financial Statements

Analyzing and Interpreting Financial Statements

Revenues, Receivables, and Operating Expenses

Inventory, Accounts Payable, and Long-Term Assets

Stock Transactions, Dividends, and EPS

Intercorporate Investments

Leases, Pensions, and Income Taxes

Cash Flows

Forecasting Financial Statements

Using Financial Statements for Valuation

Filters