Deck 11: Reporting and Interpreting Stockholders Equity

Question 1

On January 1, 20A, Goldstein Company purchased a machine. The seller agreed that a total of $9,000 would be paid over a three-year period--$3,000 per year at the end of 20A, 20B, and 20C. At the time the machine was purchased, the market rate of interest was 10%. What amount should be debited to the asset account, Machinery, on the date of purchase (round to the nearest dollar)?

A) $9,000
B) $7,461
C) $9,016
D) $9,948

Answer 1

B

Question 2

Kristen's grandmother promises to give her $3,000 at the end of three years and $4,000 at the end of four years. How much is the money worth today if Kristen could earn 6% annual interest on the funds?

A) $16,237
B) $21,879
C) $5,545
D) $5,687

Answer 2

D

Question 3

In 2014, P Co reported net earnings of $1,933 million, interest expense of $395 million and income taxes of $270 million. In 2013, they reported net earnings of $2,142 million, interest expense of $478 million and income taxes of $818 million. Calculate the times interest earned ratio for 2014 and 2013, respectively.

A) 6.05 and 5.48 times
B) 5.05 and 4.48 times
C) 5.73 and 6.19 times
D) 6.58 and 7.19 times

Answer 3

D

Question 4

Which of the following statements pertaining to instalment notes with blended principal and interest payments is correct?

A) The portion of each instalment applied to the interest and principal will remain constant.
B) The portion of the instalment applied to the interest will depend on prevailing market interest rates, with the difference being applied to the principal.
C) The portion of the instalment applied to the principal will increase, while the portion applied to the interest will decrease over time.
D) The portion of the instalment applied to the principal will decrease, while the portion applied to the interest will increase over time.

Question 5

If there is a loss on bonds redeemed early, it is

A) reported as "Other Expense" on the statement of earnings.
B) debited to Interest Expense, as a cost of financing.
C) reported as part of earnings from operations on the statement of earnings.
D) debited directly to Retained Earnings.

Question 6

How much would Kristen have to deposit in the bank at the end of each of the next five years if she wishes to have $5,000 in the bank at the end of that time period, assuming she will be earning 6% annual rate of return? (Round to the nearest dollar).

A) $1,000
B) $1,187
C) $943
D) $887

Question 7

On January 1, 2013, Carter Ltd. issued a 15-year, $600,000 instalment note payable, with annual fixed principal payments of $40,000, plus 5% interest. The cash payment for the first year is:

A) $42,000
B) $70,000.
C) $30,000
D) $40,000.

Question 8

Positive financial leverage occurs in which of the following situations?

A) The company's after-tax return on total assets is less than the after-tax cost of borrowing.
B) Payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.
C) The return to the owners is enhanced through the use of debt financing.
D) Interest payments can be deducted for income tax purposes.

Question 9

Which of the following is true?

A) It is common for companies to both retire debt and issue new bonds in the same year as a way to replace higher interest rate debt with lower rate issuances.
B) The corporation will have to pay cash to bond investors when those investors demand to call the bonds.
C) Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.
D) Retractable bonds require cash outflow connected to investing when the issuing corporation redeems the bonds.

Question 10

There is a reciprocal relationship between which of the following?

A) Present value of $1 and the future value of $1.
B) Present value of the annuity of $1 and the future value of annuity of $1.
C) Future value of $1 and the future value of an annuity.
D) Present value of the annuity of $1 and the present value of $1.

Question 11

Bond discounts should be amortized to comply with the

A) revenue recognition principle.
B) matching process.
C) cost principle.
D) full disclosure principle.

Question 12

Kristen deposits $5,000 in the bank today. She will be earning 6% interest annually on her deposit. How much money will she have in the bank at the end of 5 years? (Round to the nearest dollar).

A) $21,062
B) $6,691
C) $28,186
D) $3,736

Question 13

Which of the following statements is not true?

A) The times interest earned ratio gives an indication of a company's ability to meet interest payments as they come due.
B) EBIT can be calculated by adding interest expense and income tax expense to net earnings.
C) The times interest earned ratio is calculated by dividing the sum of net earnings, interest expense, and income tax expense, by interest expense.
D) The higher a company's debt to total assets ratio, the lower the company's times interest earned ratio will be.

Question 14

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two equal payments after the acquisition date. What is the interest concept that best describes this application?

A) Future value of an annuity.
B) Future value of a single amount.
C) Present value of a single amount.
D) Present value of an annuity.

Question 15

A $100,000 bond was retired at 95 when the carrying amount of the bond was $103,000. The entry to record the retirement would include a:

A) loss on bond redemption of $3,000.
B) gain on bond redemption of $3,000.
C) gain on bond redemption of $8,000.
D) loss on bond redemption of $8,000.

Question 16

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions specified in the indenture?

A) Rate of interest to be paid.
B) Maturity date.
C) Cash to be received at the issue date.
D) Dates of interest payments.

Question 17

When a bond investment is sold (issued) at a discount, subsequent amortization of the discount does which of the following?

A) Decreases interest in the bond.
B) Decreases interest expense.
C) Has no effect upon interest expense.
D) Increases interest expense.

Question 18

On November 1, 20A, Katz Company purchased twenty $1,000, 9% bonds (interest is payable each April 30, and October 31) at 97. What is the amount that should be recorded in the long-term investment account on November 1, 20A?

A) $20,000
B) $18,800
C) $20,600
D) $19,400

Question 19

One thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issue is

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 20

An amount is to be deposited in a savings account at the end of each year in order to provide funds for a trip to Europe, at the end of the fourth year. You have been asked to determine the amount of the annual deposit. What is the interest concept that best describes this application?

A) Future value of an annuity.
B) Future value of a single amount.
C) Present value of a single amount.
D) Present value of an annuity.

Question 21

Kristen deposits $5,000 in the bank at the end of each year for five years. How much money will she have in the bank at the end of five years, assuming she will be earning 6% interest annually on her deposits? (Round to the nearest dollar).

A) $3,736
B) $6,691
C) $28,186
D) $21,062

Question 22

Which of the following statements is true?

A) The corporation will have cash inflow when bonds are issued for an amount equal to, greater than, or less than the par value of the bonds.
B) The corporation will have an outflow of cash connected to an investing activity when interest is paid to bond investors.
C) The corporation will have to pay cash to bond investors when those investors demand to call the bonds.
D) An outflow of cash when convertible bonds are converted is a financing activity.

Question 23

Tasker Inc. earned a gross profit of $300,000 on sales of $1,200,000 during 2013. The company also had operating expenses of $180,000. These operating expenses included interest expense of $40,000. The company is subject to an effective tax rate of 30%. What is the company's times interest earned ratio for the year?

A) 4.5 times
B) 4 times
C) 5 times
D) 3.2 times

Question 24

If bonds have been issued at a discount, then over the life of the bonds the

A) carrying amount of the bonds will increase.
B) interest expense will decrease.
C) unamortized discount will increase.
D) carrying amount of the bonds will decrease.

Question 25

On November 1, 20A, Duval Company sold (issued) 300, $1,000, ten-year, 7% bonds at 97. The bonds were dated November 1, 20A, and interest is payable each November 1 and May 1. What would be the amount of discount amortization at each semi-annual interest date (assume straight-line amortization)?

A) $100
B) $50
C) $600
D) $450

Question 26

On January 1, 20A, Winston Corporation sold a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Assuming effective-interest amortization is used, the interest expense on the 20A income statement would be which of the following amounts (to the nearest dollar)?

A) $1,547
B) $700
C) $773
D) $883

Question 27

On the maturity date of bonds payable after interest has been paid, the issuing company will do which of the following?

A) Pay bondholders the original amount the bondholders paid to purchase the bonds.
B) Debit Cash and credit Bonds Payable for the carrying amount of the bonds.
C) Record a loss of the market rate of interest on the maturity date exceeds the stated rate of interest.
D) Debit Bonds Payable and credit Cash for the par value of the bonds.

Question 28

The times interest earned ratio is calculated by dividing

A) net earnings by interest expense.
B) net earnings before interest expense and income taxes by interest expense.
C) net earnings before interest expense by interest expense.
D) net earnings before income taxes by interest expense.

Question 29

If the market interest rate is higher than the coupon interest rate (or stated rate) of the bond, the bond sells:

A) at a premium.
B) at a discount.
C) at face value.
D) It is undeterminable.

Question 30

Bonds usually are issued to obtain cash for what purpose?

A) Acquisitions of long-term assets.
B) Meeting working capital needs.
C) Purchasing insurance.
D) Investing in short-term marketable securities.

Question 31

In 2014, H Co's times interest earned ratio was 2.51 while T Co's ratio for that year was .80. Which of the following statements is false?

A) H Co.'s ratio shows an extra margin of risk in case profitability deteriorates.
B) T Co's ratio is very low and they present high risk to their creditors and investors.
C) Since H Co's is actively pursuing growth through investment in other companies, its ratio may improve once those investments begin to generate additional net earnings.
D) H Co's ratio appears to provide adequate coverage of interest from its present net earnings.

Question 32

Pleasant Company has established a pension plan for its employees that operates as follows: Each year, Pleasant Company places a fixed dollar amount in a pension fund for each employee. The funds are then invested. Upon retirement, each employee is entitled to the cash value of the funds that have been invested in his/her name. This arrangement is an example of which of the following?

A) Contingent program.
B) Deferred timing program.
C) Defined benefit program.
D) Defined contribution program.

Question 33

Present value can be defined as which of the following?

A) Value today of future cash inflow(s).
B) Sum of cash inflows over a future period of time.
C) Future amount of a sum of money held now.
D) Maturity value of a debt.

Question 34

On January 1, 20A, A-Ace Corp. issued $3,000,000 par value 12%, 10 year bonds which pay interest each December 31. If the market rate of interest was 14%, what should the issue price of the bonds be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)

A) $2,686,896
B) $3,339,084
C) $2,843,172
D) $3,000,000

Question 35

Kristen's grandmother promises to give her $1,000 at the end of five years. How much is the money worth today, assuming Kristen could invest the money and earn a 6% annual rate of return? (Round to the nearest dollar).

A) $5,637
B) $4,212
C) $747
D) $1,338

Question 36

When the bond liability reported on the statement of financial position increases each year, this indicates that the bond was:

A) issued at a discount.
B) issued at face value.
C) issued at a premium.
D) issued at net realizable value.

Question 37

A $100,000 bond was retired at 96 when the carrying amount of the bond was $105,000. The entry to record the retirement would include a:

A) gain on bond redemption of $4,000.
B) gain on bond redemption of $9,000.
C) loss on bond redemption of $8,000.
D) loss on bond redemption of $4,000.

Question 38

A company decides to redeem its bonds before maturity for 101. The face value of the bonds is $5,000,000 and the carrying amount on date of redemption is $4,945,000. The journal entry to record this transaction is:

A)
B)

C)
D)

Question 39

Bonds issued at a premium reduce:

A) the bond value to be shown on the balance sheet.
B) the perceived risk to the bondholder.
C) the cost of borrowing.
D) the interest payments to be made to the bondholder.

Question 40

Manu Corporation issued $200,000 of 4%, 5-year bonds for proceeds of $192,330. The market interest rate is 6%. Interest is paid semi-annually. How much bond interest expense is recorded on the first interest date?

A) $6,000
B) $4,000
C) $3,847
D) $5,770

Question 41

A $500,000 bond is retired at 97 when the carrying amount of the bond is $480,000. The entry to record the retirement would include a:

A) $15,000 gain.
B) $5,000 loss.
C) $2,000 gain.
D) $20,000 loss.

Question 42

When a bond is issued at a discount, the amount of interest expense for an interest period is calculated by multiplying the amount times the interest rate during the period.

A) face, market
B) face, stated
C) carrying, market
D) carrying, stated

Question 43

On December 31, 20A, Dive Company sold $100,000, ten-year, 8% bonds at 104.5. The bonds were dated January 1, 20A, and interest is payable each June 30 and December 31. The company uses the straight-line amortization method. The company should report the long-term liability (carrying value) for the bonds on the December 31, 20A, statement of financial position as which of the following?

A) $104,500
B) $100,000
C) $104,000
D) $103,400

Question 44

On July 1, 20B, WildWorld Inc. sold (issued) 300, $1,000, ten-year, 7% bonds at 101. The bonds were dated July 1, 20B, and semi-annual interest will be paid each December 31 and June 30. WildWorld uses straight-line amortization. What is the bond liability that would be reported on the statement of financial position at December 31, 20B?

A) $303,000
B) $302,700
C) $302,850
D) $300,000

Question 45

Bonds payable usually are classified on the statement of financial position as which of the following?

A) Current assets.
B) Investments and funds.
C) Long-term liabilities.
D) Current liabilities.

Question 46

Accurate Numbers, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 20A, for $102,360 on April 1, 20A. The bonds pay interest on April 1 and October 1. Straight-line amortization is used by the company. What entry is needed at October 1 for the first interest payment?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 47

Which item listed below does not influence the issue price (present value) of a bond?

A) The market rate of interest
B) The dollar amounts to be received
C) The reason the bond was issued
D) The length of time until the amounts are received

Question 48

On December 31, 20A, Bennett recorded an adjusting entry to account for interest that had accrued on the note. What is the approximate amount of interest expense that would have accrued at December 31, 20A?

A) $76,200
B) $96,000
C) $25,402
D) $32,000

Question 49

The amortization of bond premium by the issuer will do which of the following?

A) Have no effect on interest expense.
B) Increase interest expense.
C) Determine the cash paid for interest.
D) Decrease interest expense.

Question 50

If the market rate of interest is 10%, a rational person would just as soon receive $1,100 three years from now as what amount today (round to the nearest dollar)?

A) $1,100
B) $783
C) $1,000
D) $826

Question 51

You have been asked to compute the amount of a fund that will be available at the end of three years as a result of a single sum of $1,000 that is deposited. What is the interest concept that best describes this application?

A) Present value of a single amount.
B) Future value of annuity.
C) Future value of a single amount.
D) Present value of an annuity.

Question 52

If bonds have been issued at a premium, then over the life of the bonds the

A) carrying amount of the bonds will decrease.
B) carrying amount of the bonds will increase.
C) unamortized discount will increase.
D) interest expense will remain unchanged.

Question 53

Calculation of the amount of the equal periodic payments that would be required at the end of each year to accumulate a $20,000 fund at the end of the tenth year is most readily determined by reference to a table that shows which of the following?

A) Future value of $1.
B) Future value of annuity of $1.
C) Present value of a single sum.
D) Present value of $1.

Question 54

In 2014, The W D Co. had total liabilities of $22,704 million and total assets of $43,679 million. In 2013, they had total liabilities of $21,990 million and total assets of $41,378 million. Calculate their debt to equity ratio for 2014 and 2013, respectively.

A) .92 and .88
B) 1.08 and 1.13
C) .52 and .53
D) .48 and .47

Question 55

If a bond payable is sold (issued) at a premium, the amount of the carrying value (the long-term liability) reported on the subsequent statements of financial position does which of the following?

A) Increases each year.
B) Changes from year to year depending upon the market rate of interest each year.
C) Remains constant.
D) Decreases each year.

Question 56

The amortization of a bond discount results in periodic interest expense

A) increasing over the term of the bond issue.
B) equal to the constant percentage of the carrying amount of the bonds.
C) greater than the constant percentage of the carrying amount of the bonds.
D) less than the constant percentage of the carrying amount of the bonds.

Question 57

A corporation issues $100,000, 10%, 5-year bonds on January 1, 2014 for $108,111, at a price to yield 8%. Interest is paid semi-annually on January 1 and July 1. The amount of premium amortized on July 1, 2014 is

A) $5,000
B) $4,324
C) $676
D) $8,649

Question 58

In 2014, C Co. reported a times interest earned ratio of 12.33 times while P Co. reported a ratio of 11.07 times. Which of the following statements is false?

A) C Co. is more liquid than P. Co.
B) Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.
C) P Co. and C Co. have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels.
D) C Co's ratio is about 11.3% higher than P Co's ratio.

Question 59

How much would Kristen have to deposit in the bank today if she will be earning a 6% annual rate of return and wants to have $5,000 in the bank at the end of five years? (Round to the nearest dollar).

A) $5,637
B) $4,737
C) $4,212
D) $3,736

Question 60

On January 1, 20A, Ross Company acquired a truck that had a purchase price of $20,000. The seller agreed to allow Ross to pay for the truck over a two-year period at 10% interest with equal payments due at the end of 20A and 20B. What is the amount of each annual payment the company must make (round to the nearest dollar)?

A) $14,151
B) $17,751
C) $11,524
D) $22,267

Question 61

Under the effective-interest method, the interest paid each year is the same but the interest expense recorded is different.

Question 62

Assume that you borrow $10,000 at an annual interest rate of 6%. Your loan agreement calls for monthly payments of $200, which include both interest and principal. Your first payment is made one month after you received the loan. The amount of interest and principal applied to your first instalment, respectively, would be:

A) $60 and $150.
B) $140 and $60.
C) $50 and $150.
D) $150 and $50.

Question 63

Bonds are often traded on an organized exchange.

Question 64

If a bond has a face value of $5,000 and a contractual interest rate of 6 percent, then the interest paid semi-annually will be $150.

Question 65

Match the type of bond with the appropriate description.
Type of Bond
A. Debentures
B. Secured bonds
C. Ordinary bonds
D. Serial bonds
E. Callable bonds
F. Redeemable bonds
G. Convertible bonds
H. Registered bonds
I. Coupon bonds
J. Indentures
K. None of the above Description
____ 1. When the bond interest date approaches, the investor detaches a form from the bond, signs it, and mails it to the issuing company.
____ 2. Bonds that can be exchanged for other securities of the issuer, at the optio of the investor.
3. There is no pledge of assets, or mortgage, as a guarantee of payment of th bonds at maturity.
4. Bonds that may be called for early retirement at the option of the issuer.
5. The payment of the principal as a single sum at a specified date.
____ 6. Payment of bond interest is made only to the investor currently on the records of the issuer.
____ 7. Bonds that may be turned in for early retirement at the option of the investor.
____ 8. Bonds that include a mortgage or pledge of specific assets as a guarantee of repayment at maturity.

Question 66

Kristen's grandmother promises to give her $1,000 at the end of each of the next five years. How much is the money worth today, assuming Kristen could invest the money and earn a 6% annual rate of return? (Round to the nearest dollar).

A) $4,212
B) $747
C) $1,338
D) $5,637

Question 67

On Bennett's 20A year-end statement of financial position, the book value of the liability for notes payable related to this purchase would equal which of the following?

A) An amount more than $317,520.
B) An amount less than $317,520.
C) An amount more or less than $317,520 depending upon Bennett's income for the year.
D) $317,520

Question 68

The times interest earned ratio is calculated by dividing net earnings by interest expense.

Question 69

The issuance and retirement of bonds have significant impact on investing cash flows.

Question 70

Interest expense on a note payable is only recorded at maturity.

Question 71

Match the way a bond will sell with the situations given. Bond will sell for
A. Par
B. A discount
C. A premium
D. None of the above Situation
____ 1. Bond sells at 108.
____ 2. Bond sells at 93.
____ 3. Bond sells at 100.
____ 4. The effective rate is greater than the stated rate.
____ 5. The stated rate equals the effective rate.
____ 6. The stated rate exceeds the effective rate.

Question 72

Accrued interest was recorded annually. On December 31, 20C, the due date of the note, Bennett paid the amount due and recorded the transaction with which of the following?

A) A debit to notes payable for $317,520.
B) A debit to notes payable for $400,000.
C) A credit to notes payable for $400,000.
D) A credit to notes payable for $317,520.

Question 73

Which of the following is true?

A) An outflow of cash when callable bonds are recalled by the issuer is a financing activity.
B) An outflow of cash for interest payments is an investing activity.
C) An outflow of cash when convertible bonds are converted is an investing activity.
D) Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.

Question 74

Match the definitions with the appropriate terms. Definition
A. The issue price of the bond.
B. A cash fund set up to retire bonds.
C. The theoretically correct approach to amortizing bond discount or premium.
D. Involves repayment of the bond in instalments.
E. The bond contract containing legal provisions relating to the bond.
F. None of the above.
Term
____ 1. Equipment trust bond
____ 2. Effective-interest amortization method
____ 3. Current cash equivalent amount
____ 4. Serial bond
____ 5. Ordinary payment bond
6. Debenture
____ 7. Bond sinking fund
____ 8. Straight-line amortization method
____ 9. Indenture

Question 75

Bonds are debt instruments issued by corporations and government units in order to raise large amounts of money.

Question 76

The financial leverage ratio compares the amount of capital supplied by creditors to the amount supplied by owners.

Question 77

On January 1, 20A, Tie Company purchased a machine that had a sticker (list) price of $22,000. The seller agreed to allow Tie Company to pay for the machine over a three-year period at 10% interest on the unpaid balance and with equal payments of
$8,444 due at the end of 20A, 20B, and 20C. What is the amount that should be debited to the asset account, Machinery, on the day the contract was initiated is (rounded to the nearest dollar)?

A) $22,000
B) $27,865
C) $20,999
D) $25,332

Question 78

Most notes are not interest bearing.

Question 79

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments added to the premium.

Question 80

On January 1, 20A, Washer Company sold (issued) 600, $1,000, five-year, 8% bonds at 95. The bonds were dated January 1, 20A, and interest is payable each June 30 and December 31. The company uses the straight-line method of amortization. What is the amount of the net liability for bonds payable that would be reported on the December 31, 20A, statement of financial position?

A) $573,000
B) $576,000
C) $600,000
D) $597,000