Deck 14: Long-Term Liabilities

Question 1

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

Answer 1

True

Question 2

The legal contract between the issuing corporation and the bondholders is called the bond indenture.

Answer 2

True

Question 3

Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Answer 3

False

Question 4

Interest on bonds is tax deductible.

Question 5

The relationship between the market rate of a bond and the rate of return on the borrowed funds affects the company's return on equity.

Question 6

A bond's par value is not necessarily the same as its market value.

Question 7

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

Question 8

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

Question 9

The carrying value of a long-term note is computed as the present value of all remaining future payments, discounted using the market rate at the time of issuance.

Question 10

Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.

Question 11

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Question 12

Bond market values are expressed as a percent of their par (face)value.

Question 13

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

Question 14

Debentures always have specific assets of the issuing company pledged as collateral.

Question 15

A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

Question 16

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

Question 17

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

Question 18

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

Question 19

A bond with a par value of $1,000 trading at 101½ sells for a premium.

Question 20

A bond with a par value of $1,000 trading at 97½ sells for a premium.

Question 21

A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

Question 22

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

Question 23

The present value of an annuity is equal to the sum of the individual future values for each payment.

Question 24

The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

Question 25

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

Question 26

The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies that an annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.

Question 27

An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.

Question 28

A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with periodic interest payments. Normal 0 false false false EN-IN X-NONE X-NONE

Question 29

An advantage of bond financing is that issuing bonds does not affect owner control.

Question 30

A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.

Question 31

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

Question 32

Mortgage bonds are backed only by the good faith and credit of the issuing company.

Question 33

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Question 34

A company borrows $10,000 and issues a 5-year, 6% installment note with interest payable annually. The factor for the present value of an annuity at 6% for 5 years is 4.2124. The factor for the present value of a single sum at 6% for 5 years is 0.7473. The amount of the annual payment is
$2,373.94.

Question 35

Periodic interest payments on bonds are determined by multiplying the par value of the bond by the contract rate.

Question 36

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s)to the lessor.

Question 37

The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.

Question 38

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

Question 39

An annuity is a series of equal payments at equal time intervals.

Question 40

A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.

Question 41

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Question 42

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Question 43

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Question 44

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The total interest expense on the bond over its eight-year life is $400,000.

Question 45

A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure decreased during Year 2.

Question 46

The carrying (book)value of a bond at the time it is issued is always equal to its par value.

Question 47

A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

Question 48

The use of debt financing ensures an increase in return on equity.

Question 49

When the contract rate on a bond issue is less than the market rate, the bonds sell at a discount.

Question 50

When the contract rate is above the market rate, a bond sells at a discount.

Question 51

A company's ability to issue unsecured debt depends on its credit standing.

Question 52

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Question 53

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

Question 54

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Question 55

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Question 56

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Question 57

The contract rate on previously issued bonds changes as the market rate of interest changes.

Question 58

A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.

Question 59

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

Question 60

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

Question 61

The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.

Question 62

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

Question 63

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Question 64

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $1,634.69.

Question 65

A premium reduces the interest expense of a bond over its life.

Question 66

Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:

A)Coupon bonds.
B)Registered bonds.
C)Callable bonds.
D)Bearer bonds.
E)Serial bonds.

Question 67

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Question 68

Secured bonds:

A)Are backed by the issuer's bank.
B)Are called debentures.
C)Are the same as sinking fund bonds.
D)Have specific assets of the issuing company pledged as collateral.
E)Are subordinated to those of other unsecured liabilities.

Question 69

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Question 70

A discount reduces the interest expense of a bond over its life.

Question 71

Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:

A)Sinking fund bonds.
B)Callable bonds.
C)Convertible bonds.
D)Serial bonds.
E)Junk bonds.

Question 72

Premium on Bonds Payable is an adjunct liability account, as it increases the carrying value of the bond.

Question 73

Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

Question 74

Sinking fund bonds:

A)Require equal payments of both principal and interest over the life of the bond issue.
B)Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
C)Decline in value over time.
D)Are bearer bonds.
E)Are registered bonds.

Question 75

Bonds that have interest coupons attached to their certificates, which the bondholders present to a bank or broker for collection, are called:

A)Serial bonds.
B)Coupon bonds.
C)Registered bonds.
D)Callable bonds.
E)Convertible bonds.

Question 76

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is
$25,000.

Question 77

When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

Question 78

When the contract rate of a bond is greater than the market rate on the date of issuance, the bond sells at a discount.

Question 79

A bond traded at 102½ means that:

A)The market rate of interest is 2½% above the contract rate.
B)The bonds were retired at $1,025 each.
C)The bond traded at 102.5% of its par value.
D)The bond pays 2.5% interest.
E)The market rate of interest is 2.5%.

Question 80

The market value (issue price)of a bond is equal to the present value of all future cash payments provided by the bond.