Question 1

Financial leverage is also known as trading on the equity.

Accepted Answer

A) True 
 B)False  True

Question 2

As the interest coverage ratio declines, the risk for creditors also declines.

Accepted Answer

A) True 
 B)False  False

Question 3

The amount of cash received on issuance of a 9 percent, $10,000 bond dated February 1 and issued June 1 at 102 1/2 is

Accepted Answer

A)  $10,300. 
B)  $11,100. 
C)  $10,200. 
D)  $10,550. 
A)  $10,300. 
B)  $11,100. 
C)  $10,200. 
D)  $10,550. D

Question 4

The interest coverage ratio equals income before income taxes plus interest expense divided by

Accepted Answer

A)  income before income taxes. 
B)  net income. 
C)  interest expense. 
D)  total assets. 
A)  income before income taxes. 
B)  net income. 
C)  interest expense. 
D)  total assets.

Question 5

A capital lease is a lease of property, plant, or equipment that is in effect an installment purchase.

Accepted Answer

A) True 
 B)False

Question 6

When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.

Accepted Answer

A) True 
 B)False

Question 7

Bondholders share voting rights with stockholders.

Accepted Answer

A) True 
 B)False

Question 8

On January 1, 2010, Lurline Corporation issued ten-year, 8 percent bonds with a face value of $500,000. The semiannual interest dates are June 30 and December 31. The bonds were issued for $437,740 875,480 to yield an effective annual rate of 10 percent. The accounting year ends on December 31. Prepare entries in journal form without explanations to record the bond issue on January 1, 2010, and the payments of interest and amortization of discount on June 30 and December 31, 2010. Use the effective interest method of amortization. Round answers to the nearest dollar.

Accepted Answer

The answer of On January 1, 2010, Lurline Corporation issued...

Question 9

Which of the following is not an advantage of issuing long-term debt?

Accepted Answer

A)  The stockholders do not relinquish any control. 
B)  The interest is tax-deductible. 
C)  The risk of becoming bankrupt is reduced. 
D)  Increased earnings accrue to the stockholders. 
A)  The stockholders do not relinquish any control. 
B)  The interest is tax-deductible. 
C)  The risk of becoming bankrupt is reduced. 
D)  Increased earnings accrue to the stockholders.

Question 10

On March 1, 2009, Sklar Corporation issued bonds with a face value of $400,000. The bonds carry a face interest rate of 12 percent that is payable each June 30 and December 31. The bonds were sold at 100. The corporation's accounting year ends on December 31.
a. Prepare an entry in journal form without explanation to record the issuance of the bonds on March 1, 2009.
b. Prepare an entry in journal form without explanation to record the interest payment on June 30, 2009.
c. Prepare an entry in journal form without explanation to record the interest payment on December 31, 20 09 .
   
d. Calculate the amount that should appear for Bond Interest Expense on Sklar's income statement for the year ended December 31, 2009. Show your calculations.
e. Calculate the amount that should appear for Bond Interest Expense on Sklar's income statement for the year ended December 31, 2010 . Show your calculations.

Accepted Answer

The answer of On March 1, 2009, Sklar Corporation issued...

Question 11

Under a capital lease, the lessee does not record which of the following?

Accepted Answer

A)  Rent expense 
B)  Capital lease obligations 
C)  Depreciation on the leased asset 
D)  Capital lease assets 
A)  Rent expense 
B)  Capital lease obligations 
C)  Depreciation on the leased asset 
D)  Capital lease assets

Question 12

Penmark Corporation issued 15-year term bonds at a discount in 2009. Interest is payable semiannually. Which of the following statements is true, assuming that the effective interest method of amortization is used for the bond discount?

Accepted Answer

A)  Interest expense decreases each six-month interest period. 
B)  Interest expense as a percentage of the bond's book value changes from period to period. 
C)  Interest expense increases each six-month interest period. 
D)  Interest expense remains constant in amount for each interest period. 
A)  Interest expense decreases each six-month interest period. 
B)  Interest expense as a percentage of the bond's book value changes from period to period. 
C)  Interest expense increases each six-month interest period. 
D)  Interest expense remains constant in amount for each interest period.

Question 13

The debt to equity ratio is a measure of financial leverage.

Accepted Answer

A) True 
 B)False

Question 14

A bond issue of $50,000 with a carrying value of $49,000 is converted into $10 par value common stock at the rate of fifty shares for each $1,000 bond. The entry to be recorded on the conversion of bonds is:

Accepted Answer

The answer of A bond issue of $50,000 with a...

Question 15

The matching rule dictates that both the accrued interest and the amortization of a premium or discount be recorded at the year end.

Accepted Answer

A) True 
 B)False

Question 16

All of the following are operating leases except a

Accepted Answer

A)  monthly lease on a building that can be canceled with 90 days' notice. 
B)  ten-year lease on a new building. 
C)  two-year lease on a truck with an option to renew for one more year. 
D)  five-year lease of a computer with an option to buy for a small amount at the end of the lease. 
A)  monthly lease on a building that can be canceled with 90 days' notice. 
B)  ten-year lease on a new building. 
C)  two-year lease on a truck with an option to renew for one more year. 
D)  five-year lease of a computer with an option to buy for a small amount at the end of the lease.

Question 17

The interest coverage ratio is expressed as a percentage.

Accepted Answer

A) True 
 B)False

Question 18

Regardless of whether the straight-line method or the effective interest method is used, the carrying value of a term bond issued at a discount will decrease continually over the life of the bond.

Accepted Answer

A) True 
 B)False

Question 19

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization, the effective interest method should be used.

Accepted Answer

A) True 
 B)False

Question 20

A corporation's stockholders are the primary recipients of financial leverage.

Accepted Answer

A) True 
 B)False

Exam 13: Long Term Liabilities

Financial leverage is also known as trading on the equity.

As the interest coverage ratio declines, the risk for creditors also declines.

The amount of cash received on issuance of a 9 percent, $10,000 bond dated February 1 and issued June 1 at 102 1/2 is

The interest coverage ratio equals income before income taxes plus interest expense divided by

A capital lease is a lease of property, plant, or equipment that is in effect an installment purchase.

When bonds are called for retirement, any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.

Bondholders share voting rights with stockholders.

Which of the following is not an advantage of issuing long-term debt?

Under a capital lease, the lessee does not record which of the following?

Penmark Corporation issued 15-year term bonds at a discount in 2009. Interest is payable semiannually. Which of the following statements is true, assuming that the effective interest method of amortization is used for the bond discount?

The debt to equity ratio is a measure of financial leverage.

A bond issue of $50,000 with a carrying value of $49,000 is converted into $10 par value common stock at the rate of fifty shares for each $1,000 bond. The entry to be recorded on the conversion of bonds is:

The matching rule dictates that both the accrued interest and the amortization of a premium or discount be recorded at the year end.

All of the following are operating leases except a

The interest coverage ratio is expressed as a percentage.

Regardless of whether the straight-line method or the effective interest method is used, the carrying value of a term bond issued at a discount will decrease continually over the life of the bond.

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization, the effective interest method should be used.

A corporation's stockholders are the primary recipients of financial leverage.

Uses of Accounting Information and the Financial Statements

Analyzing Business Transactions

Measuring Business Income

Completing the Accounting Cycle

Financial Reporting and Analysis

The Operating Cycle and Merchandising Operations

Internal Control

Inventories

Cash and Receivables

Current Liabilities and Fair Value Accounting

Long Term Assets

Contributed Capital

The Corporate Income Statement and the Statement of Stockholders Equity

The Statement of Cash Flows

Financial Performance Measurement

Partnerships

The Changing Business Environment-A Managers Pers

Cost Concepts and Cost Allocation

Costing Systems: Job Order Costing

Costing Systems Process Costing

Activity-Based Systems-Abm and Lean

Cost Behavior Analysis

The Budgeting Process

Performance Management and Evaluation

Standard Costing and Variance Analysis

Short Run Decision Analysis

Capital Investment Analysis

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