Deck 9: Long Term Liabilities

Question 1

A significant disadvantage of financing with debt rather than stock is the fact that the interest expense on debt is not tax-deductible.

Answer 1

The statement provided in the input question is actually incorrect. A significant advantage of financing with debt rather than stock is that the interest expense on debt is tax-deductible. This means that when a company pays interest on its debt, it can deduct that expense from its taxable income, effectively reducing the amount of tax it owes. This tax benefit is one of the key reasons why companies may choose to finance operations or expansions through debt.

Question 2

When a bond is issued at a discount, the amortization of the bond interest increases each year using the straight line method.

Answer 2

When a bond is issued at a discount, it means that the bond is sold for less than its face value. The discount on the bond represents additional interest expense to the issuer over the life of the bond. To account for this additional interest expense, the issuer must amortize the discount over the life of the bond.

Question 3

The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the market rate of interest at the time the bonds are issued.

Answer 3

Not Answer

Question 4

Debenture bonds are backed by specific collateral of the issuing company.

Question 5

A bond issue price is the present value of the cash flows that the bond will produce.

Question 6

The market value of a bond is determined by calculating its present value, which is based on the face amount, the number of periods, and the market rate of interest.

Question 7

Callable bonds may be retired by the issuer before their specified due date.

Question 8

The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period.

Question 9

Mortgage bonds are secure bonds.

Question 10

The amortization of a bond premium increases the effective interest expense incurred each period for the issuer.

Question 11

The contract rate is also called the coupon or stated rate.

Question 12

The debt-to-equity ratio is defined as total liabilities divided by total stockholders' equity.

Question 13

When the yield rate of interest is greater than the stated rate, then the bond will be issued at a discount.

Question 14

Bonds are generally issued in denominations of $1,000.

Question 15

In a short-term lease, the lessor retains the risks and obligations of ownership.

Question 16

Convertible bonds normally allow bondholders to convert the bond into another security.

Question 17

If a bondholder has the right to retire the bonds, they are referred to as callable.

Question 18

Long-term debt generally refers to obligations that extend beyond one year.

Question 19

The relative cost of issuing debt (interest payments) is often lower than the cost of issuing equity.

Question 20

A lease is accounted for as a short-term lease if the present value of the lease payments is at least 90 percent of the fair value of the leased property.

Question 21

____________________ is the amortization method of transferring the same amount from the bond discount or premium each time period to adjust interest expense.

Question 22

Obligations that extend beyond one year are referred to as ____________________.

Question 23

Discount on Bonds Payable is shown on the balance sheet as a ____________________.

Question 24

An advantage of financing with debt rather than stock is that interest expense is ____________________ for tax purposes.

Question 25

Under the effective interest method of amortization, the interest expense for each period is the carrying value times the ____________________.

Question 26

The bond's ____________________ price is typically quoted as a percentage of the face value of the bond.

Question 27

Although short-term leases are not recorded on the balance sheet by the lessee, they are disclosed in the ____________________.

Question 28

A(n) ____________________ lease is recorded on the lessee's balance sheet as an asset and related liability.

Question 29

A potential advantage of debt financing over equity financing is that it fixes the amount of compensation to the lender.

Question 30

If the yield rate of interest is greater then the stated rate, then the bonds are issued at a ____________________.

Question 31

The effective interest method amortizes premium or discount in a manner that produces a ____________________ rate of interest from period to period.

Question 32

The amount of money the borrower agrees to repay at maturity is usually referred to as the ____________________.

Question 33

Bonds are issued at a ____________________ when the issue price exceeds the face value.

Question 34

For a long-term lease, the lessee must record both an asset and a liability. The amount of the asset is subsequently reduced by the process of ____________________.

Question 35

In periods of inflation, debt financing is preferable to equity financing because the company is able to repay the lender in dollars that have declined in purchasing power.

Question 36

The ____________________ rate of interest is a function of economic factors and the creditworthiness of the borrower.

Question 37

A bond's ____________________ is computed by taking the bond's face value, then either subtracting any unamortized discount or adding any unamortized premium.

Question 38

When each payment reduces the outstanding loan balance, which, in turn, reduces the interest expense in the subsequent period, it is call an ____________________ debt.

Question 39

____________________ bonds may be retired by the issuing company before their specified due date.

Question 40

When evaluating a company's solvency, an investor's major concern is whether all debt has been properly recorded.

Question 41

A company issued 10-year, 9%, $1,000,000 bonds paying interest on an annual basis, at a premium. Which one of the following statements is true?

A)The annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.
B)The annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.
C)The issue price will be less than $1,000,000.
D)The cash paid to bondholders will be based on the market rate of interest.

Question 42

Which of the following statements regarding bonds payable is true?

A)Generally, bonds are issued in denominations of $100.
B)When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser.
C)A debenture bond is backed by specific assets of the issuing company.
D)The interest rate in the bond contract is called the stated rate.

Question 43

Convertible bonds are attractive to bondholders because

A)they usually carry a higher rate of interest than non-convertible bonds.
B)they carry a convertible interest rate that can be increased when the market rate of interest increases.
C)they can be converted into stock at the bondholder's option.
D)the issuing company cannot retire the bonds before maturity.

Question 44

A convertible bond is one where

A)the issuer can convert from a fixed interest rate to a floating rate.
B)the issuer can convert the bond from long-term to short-term.
C)the issuer can retire the bond before its specified maturity date.
D)the bondholder can convert the bond into common stock at a future time.

Question 45

When will bonds sell at a discount?

A)The credit standing of the issuing company is not as good as other companies in a similar line of business.
B)The stated rate of interest is less than the yield rate of interest at the time of issue.
C)The stated rate of interest is more than the yield rate of interest at the time of issue.
D)The issuing company will be able to retire the bonds at less than face at maturity.

Question 46

The Discount on Bonds Payable account is shown on the balance sheet as

A)an asset.
B)an expense.
C)a long-term liability.
D)a contra-liability account that reduces the bond to market value at the issue date.

Question 47

The two promises made by a bond issuer to the purchaser of the bond are to pay periodic interest and to ___________________.

Question 48

Bonds sell at a premium when the

A)issuing company has a better reputation than other companies in the same business.
B)market rate of interest is less than the stated interest rate at the time of issue.
C)yield rate of interest is more than the stated rate at the time of issue.
D)issuing company agrees to repay the maturity before the due date.

Question 49

When bonds are sold for less than the par amount, this means that the

A)maturity value will be less than the par amount.
B)maturity value will be greater than the par amount.
C)bonds are sold at a premium.
D)stated rate of interest is less than the yield rate of interest.

Question 50

If a company's bonds are callable,
a.the bondholder has the right to sell an option on the bond.
b.the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%.
c.the bonds are never allowed to remain outstanding until the maturity date.
d.the investor never knows what the redemption price will be until the bonds are actually called.

Question 51

Bonds are a popular source of financing because

A)the relative cost of issuing debt is often lower than the cost of issuing equity.
B)financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock.
C)a company having cash flow problems can postpone payment of interest to bondholders.
D)the bondholders can always convert their bonds into stock if they choose.

Question 52

A graphics design company issued bonds in the amount of $1,000,000 with a stated interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10 years, what would be the total amount of interest paid over the life of the bonds?
a.$1,000,000
b.$400,000
c.$800,000
d.$80,000

Question 53

When bonds are issued by a company, the accounting entry shows an

A)increase in liabilities and a decrease in stockholders' equity.
B)increase in liabilities and an increase in stockholders' equity.
C)increase in assets and an increase in liabilities.
D)increase in assets and an increase in stockholders' equity.

Question 54

The times interest earned ratio divides __________________________ by interest expense.

Question 55

The Premium on Bonds Payable account is shown on the balance sheet as

A)a contra asset.
B)a reduction of an expense.
C)a separate valuation account that increases the bond liability to market value at the issue date
D)a subtraction from a long-term liability.

Question 56

A company issued $10,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds sold was

A)10,000.
B)100,000.
C)1,000,000.
D)10,000,000.

Question 57

Which of the following terms does not describe the interest rate printed on the bond certificate?

A)coupon rate
B)yield rate
C)contract rate
D)stated rate

Question 58

Kiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds?

A)Exactly $500,000 because the company would still pay interest at the stated rate.
B)Less than $500,000 because the 7% yield rate of interest was higher than the stated rate.
C)More than $500,000 because the 6% stated rate of interest was less than the yield rate.
D)The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%.

Question 59

Long-term debt generally includes

A)obligations that will be satisfied within one year.
B)accounts payable, because they are interest-bearing.
C)obligations that extend beyond one year.
D)accrued expenses.

Question 60

Which of the following would describe a callable bond?

A)Borrower has the right to pay off the bonds prior to due date.
B)Borrower has the right to issue more bonds prior to due date of existing bonds.
C)Borrower has the right to call off the interest payments on the bonds.
D)Investor has the right to call off the interest payments on the bonds.

Question 61

Kaleidoscope Paint
On January 1, 2019, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
Refer to Kaleidoscope Paint. What is the carrying value of the bonds after the first interest payment is made on June 30, 2019?
a.$480,745
b.$482,282
c.$503,245
d.$500,000

Question 62

If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will

A)decrease as the bonds approach their maturity date.
B)increase as the bonds approach their maturity date.
C)remain constant throughout the bonds' life.
D)fluctuate throughout the bonds' life.

Question 63

A corporation issued $150,000 of 10-year bonds at the stated rate of 8%, with interest payable semiannually. How much cash will the bond investors receive at the end of the first interest period?
a.$3,000
b.$6,000
c.$12,000
d.$24,000

Question 64

Kalahari Limited
On January 2, 2019, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

-Refer to Kalahari Limited. What is the carrying value of the bonds at the end of ten years before the final maturity payment is made?

A)$850,000
B)$1,200,000
C)$1,000,000
D)$1,150,000

Question 65

Kaleidoscope Paint
On January 1, 2019, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

-Refer to Kaleidoscope Paint. What is the carrying value of the bonds on the maturity date?

A)$0
B)$19,255
C)$480,745
D)$500,000

Question 66

On January 1, 2019, Kaiser Permanente issued $2,000,000 of 8% bonds at par. These bonds are due in 10 years with interest payable semi-annually on June 30 and December 31. What is the amount of the interest expense in 2019 assuming the use of the effective interest amortization method?
a.$16,000
b.$160,000
c.$1,600,000
d.$2,000,000

Question 67

Kaleidoscope Paint
On January 1, 2019, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

-Refer to Kaleidoscope Paint. The cash payment on June 30, 2019, is

A)$25,000.
B)$22,500.
C)$45,000.
D)$50,000.

Question 68

Under the effective interest method, the cash paid on each interest payment date will

A)decrease if bonds are issued at a premium.
B)increase if bonds are issued at a premium.
C)remain constant regardless of the issuance price.
D)increase if bonds are issued at a discount.

Question 69

On January 2, 2019, Kangaroo Convenience Stores issued 10-year, $5,000,000, zero-coupon bonds at 75. What is the amount of interest expense recorded in 2019 using the straight line amortization method?
a.$5,000,000
b.$3,750,000
c.$1,250,000
d.$125,000

Question 70

Which of the following statements about bond accounting under the effective interest method is correct?

A)The cash interest paid is calculated as the bond face value × the yield rate.
B)The interest expense is calculated as the carrying value × the yield rate.
C)The difference between the cash interest paid and the interest expense is added to the carrying value of bonds sold at a premium.
D)The difference between the interest expense and the interest paid is deducted from the carrying value of bonds sold at a discount.

Question 71

If bonds were initially issued at a discount, the carrying value of the bonds on the issuer's books will

A)decrease as the bonds approach their maturity date
B)increase as the bonds approach their maturity date
C)remain constant throughout the bonds' life
D)fluctuate throughout the bonds' life

Question 72

Kalahari Limited
On January 2, 2019, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

-Refer to Kalahari Limited. The interest expense on the bonds at June 30, 2019 is

A)$50,000
B)$46,000
C)$40,000
D)$42,400

Question 73

Kaleidoscope Paint
On January 1, 2019, this company issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
Refer to Kaleidoscope Paint. The interest expense on the bonds at June 30, 2019, is
a.$22,500.
b.$24,037.
c.$21,634.
d.$43,267.

Question 74

Which of the following statements regarding amortization is true?

A)Amortization of the premium causes the premium on bonds payable account to increase.
B)Amortization of the premium causes the amount of interest expense to increase.
C)Cash interest payments on bonds equals interest expense on the income statement when there is amortization of bond premium.
D)Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero.

Question 75

When determining the amount of interest to be paid on a bond, which of the following information is necessary?
a.the value of the bonds in one year
b.the selling price of the bonds
c.the stated rate of interest on the bonds
d.the effective rate of interest on the bonds

Question 76

On the issuance date, the Bonds Payable account has a balance of $55,000,000 and Premium on Bonds Payable has a balance of $5,000,000. These bonds issued at

A)$50,000,000.
B)$55,000,000.
C)$60,000,000.
D)a price that cannot be determined without knowing the stated and market interest rates.

Question 77

Kalahari Limited
On January 2, 2019, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

-Refer to Kalahari Limited. The semiannual cash payment on the bonds is

A)$50,000.
B)$40,000.
C)$42,400.
D)$46,000.

Question 78

Kalahari Limited
On January 2, 2019, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.

-Refer to Kalahari Limited. What is the carrying value of the bonds after the first interest payment is made on June 30, 2019?

A)$1,154,000
B)$1,146,000
C)$1,142,400
D)$1,000,000

Question 79

On January 1 of the current year, Kale Farms purchased a tractor for $20,000. The company signed a 6% installment note to pay off the debt with 48 monthly payments over four years. Each payment is $469.70. How much interest must be paid over the life of the loan?
a.$4,800.00
b.$2,545.60
c.$1,200.00
d.$0 since all of the interest was paid at the time the loan was recorded.

Question 80

Kalahari Limited
On January 2, 2019, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. At the maturity date, besides an interest payment, the company would repay the bondholders
a.$850,000.
b.$1,150,000.
c.$1,000,000.
d.only the last interest payment.