Deck 10: Long-Term Liabilities

Question 1

All liabilities that are not classified as current liabilities are classified as long-term.

Answer 1

True

Question 2

The face rate is also called the nominal or stated rate.

Answer 2

True

Question 3

If Tanner Company becomes less creditworthy, the market price of its bonds will decline.

Answer 3

True

Question 4

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.

Question 5

When the market rate of interest is less than the face rate, then the bond issue will be sold at a discount.

Question 6

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

Question 7

The effective interest rate method of amortization amortizes the discount or premium in a manner that produces a constant amount of interest expense from period to period.

Question 8

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

Question 9

The excess of the face value of bonds over the issue price is known as a premium.

Question 10

Serial bonds are unique because the interest is paid as a series of daily payments.

Question 11

Bonds are typically issued in denominations of $10,000.

Question 12

Convertible bonds normally sell at a higher price than non-convertible bonds.

Question 13

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

Question 14

The amortization of bond discount increases the effective interest expense incurred each period for the issuer while amortization of bond premium decreases it.

Question 15

The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.

Question 16

If an investor has the right to retire the bonds, they are referred to as callable.

Question 17

Discount on Bonds Payable is classified as a current liability.

Question 18

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

Question 19

When a bond is issued at a discount, the interest expense each year is less than the cash payment for interest.

Question 20

The issue price of a bond is always present valued using the market rate of interest.

Question 21

If the lease term is 75% or more of the property's economic life, the lease agreement should be accounted for as an operating lease.

Question 22

In an operating lease, the lessee has acquired sufficient rights of ownership and control of the property to be considered its owner.

Question 23

The terms of a lease can only be structured in one way to meet the lessor and lessee and satisfy accounting standards.

Question 24

The accounting for leases is an excellent example of the differences in how U.S.and IFRS accounting standards are applied.

Question 25

The sum of the carrying value and the redemption price at the time bonds are redeemed results in the gain or loss on redemption.

Question 26

In an operating lease, the lessee is not required to record the right to use the property as an asset or to record the obligation for payments as a liability.

Question 27

In general, the international accounting standards provide lease criteria that are similar to the U.S.standards.

Question 28

Long-term liabilities are a component of the "capital structure" of a company.

Question 29

Most long-term liabilities are related to a firm's investing activities.

Question 30

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

Question 31

Stock investors view equity as a claim against the company that must be satisfied before they get a return on their money.

Question 32

Most investors would prefer to see equity rather than debt on the balance sheet.

Question 33

IFRS typically uses a more "rule-based" approach than U.S.GAAP.

Question 34

The asset leased under an operating lease requires the lessee to record depreciation expense.

Question 35

An investor views a high debt-to-equity ratio and a low times interest earned as a favorable sign of a company's abilities to meet its long-term obligations.

Question 36

When a bond issue is retired early, the amount of unamortized discount or premium is not considered in the calculation of a gain or loss.

Question 37

In an operating lease, the lessee acquires the right to use an asset for only a limited period of time.

Question 38

When a lease is classified as an operating lease, the lease liability should be presented on the balance sheet of the lessee.

Question 39

A lease is accounted for as a capital lease if the lease term is 75% or more of the property's economic life.

Question 40

All changes in long-term liabilities are reflected in the financing activities category of the statement of cash flows.

Question 41

Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company.If the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

A) $60,000
B) $120,000
C) $30,000
D) $6,000

Question 42

[APPENDIX] Deferred tax is an amount that reconciles the differences between the income for financial purposes with the income reported for tax purposes.In most cases, it is a long-term liability.

Question 43

Convertible bonds are attractive to investors 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 prime rate of interest increases.
C) they can be converted into stock at the issuer's option.
D) the issuing company cannot retire the bonds before maturity.

Question 44

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) Most bonds are term bonds, meaning that the entire principal amount will mature on a single date.

Question 45

[APPENDIX] Temporary differences occur when an item affects both book and tax calculations but not in the same time period.

Question 46

Irwin, Inc.issued $41,000,000 of bonds.Assuming the most common denomination of bonds, the number of bonds sold was

A) 41,000,000
B) 410,000.
C) 4,100,000.
D) 41,000

Question 47

The current portion of long-term debt is a balance sheet item for Flavorful Products Company.How would it most likely be classified on the balance sheet?

A) Current liability
B) Long-term liability
C) Current asset
D) Long-term liability

Question 48

Which of the following items should not appear in the long-term liability section of the balance sheet?

A) Accrued income taxes
B) Deferred income taxes
C) Bonds payable
D) Pension obligations

Question 49

On January 2, 2016, Roof Master Construction, Inc.issued $500,000, 10-year bonds for $574,540.The bonds pay interest on June 30 and December 31.The face rate is 8% and the market rate is 6%.At the maturity date, besides an interest payment, Roof Master would repay the bondholders

A) $574,540.
B) $520,000.
C) $500,000.
D) only the last interest payment.

Question 50

A ten-year lease obligation appears on the balance sheet of Generic Products Company.How would it most likely be classified on the balance sheet?

A) Long-term liability
B) Current asset
C) Long-term asset
D) Contra-liability

Question 51

[APPENDIX] The Deferred Tax account should reflect permanent differences but not items that are temporary differences between book accounting and tax reporting.

Question 52

Rent owed to the landlord is a balance sheet item for Generic Products Company.How would it most likely be classified on the balance sheet?

A) Current liability
B) Long-term liability
C) Current asset
D) Owners' equity

Question 53

Which of the following statements regarding serial bonds is true?

A) They are likely to be issued by food companies.
B) They have shorter lives than term bonds.
C) They are strongly backed by the issuer's collateral.
D) The bonds do not all mature on the same date.

Question 54

Bonds are a popular source of financing because

A) bond interest expense is deductible for tax purposes, while dividends paid on stock are not.
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 55

[APPENDIX] A permanent difference with respect to taxes is a difference that affects the tax records but not the accounting records, or vice versa.

Question 56

The change in the Deferred Taxes account is reflected in the Operating Activities category of the statement of cash flows.

Question 57

If a company's bonds are callable,

A) the investor or buyer of the bonds has the right to retire the bonds.
B) the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while the market rate of interest is 6%.
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 58

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 59

A convertible bond is one where

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

Question 60

Which of the following statements is true with respect to long-term liabilities?

A) They are obligations that will be satisfied within one year.
B) An account payable is a good example of a long-term liability because it is interest-bearing.
C) Long-term liabilities include bonds, other long-term liabilities and deferred income taxes.
D) Accrued expenses are considered to be long-term liabilities.

Question 61

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 long-term liability.

Question 62

Bonds are sold at a premium if the

A) issuing company has a better reputation than other companies in the same business.
B) market rate of interest was less than the face rate at the time of issue.
C) market rate of interest was more than the face rate at the time of issue.
D) company will have to pay a premium to retire the bonds.

Question 63

The bond issue price is determined by calculating the

A) present value of the stream of interest payments and the future value of the maturity amount.
B) future value of the stream of interest payments and the future value of the maturity amount.
C) future value of the stream of interest payments and the present value of the maturity amount.
D) present value of the stream of interest payments and the present value of the maturity amount.

Question 64

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

A) Coupon rate
B) Effective rate
C) Face rate
D) Stated rate

Question 65

Which of the following terms does not describe an interest rate used to calculate the interest expense on the income statement?

A) Nominal rate
B) Market rate
C) Effective rate
D) Yield rate

Question 66

On the issuance date, the Bonds Payable account had a balance of $50,000,000 and Premium on Bonds Payable had a balance of $1,000,000.What was the issue price of the bonds?

A) $50,000,000
B) $49,000,000
C) $51,000,000
D) Unable to determine from the information given

Question 67

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

A) a contra asset.
B) a reduction of an expense.
C) an addition to a long-term liability.
D) a subtraction from a long-term liability.

Question 68

When determining the amount of interest to be paid on a bond, which of the following information is not necessary?

A) The face amount of the bonds
B) The selling price of the bonds
C) The face rate of interest on the bonds
D) The length of the interest period, annually or semiannually

Question 69

All of the following refer to the face rate of interest on a bond except:

A) stated rate
B) effective rate
C) nominal rate
D) coupon rate

Question 70

Bennington Corp.issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually.How much cash will the bond investors receive at the end of the first interest period?

A) $800
B) $1,600
C) $3,200
D) $4,000

Question 71

Which of the following statements is correct?

A) Bonds are issued at a price that reflects the stated rate of interest on the day the bond is purchased.
B) If the face rate of interest on a bond is not equal to the market rate of interest, then the company desiring to issue the bonds must reprint its bond certificates.
C) The actual issue price of a bond represents the present value of all future cash flows related to the bond.
D) The market rate of interest has no bearing on the selling price of the bonds.

Question 72

Endeavor Company issued 20-year bonds with a coupon rate of 6% when the market rate of interest was 9%.This means that the bonds were issued

A) at a premium.
B) at a discount.
C) at the face value.
D) with an additional 3 years of interest.

Question 73

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

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

Question 74

If bonds are issued at 101.25, this means that

A) a $1,000 bond sold for $101.25.
B) the bonds sold at a discount.
C) a $1,000 bond sold for $1,012.50.
D) the bond rate of interest is 10.13% of the market rate of interest.

Question 75

Use the information provided in the time value of money tables (Tables 9-1 through 9-4) in the text to answer the question that follows. Global Company issued $1,000,000, 8%, 7 year bonds, interest payable semiannually.The market rate of interest was 6%.The issuance price of the bonds is

A) $1,111,560
B) $1,000,000
C) $1,151,480
D) $1,112,840

Question 76

Churchill Company planned to raise $100,000 by issuing bonds.The bond certificates were printed bearing an interest rate of 8%, which was equal to the market rate of interest.However, before the bonds could be issued, economic conditions forced the market rate up to 9%.If the life of the bonds is 6 years and interest is paid annually on December 31, how much will Churchill receive from the sale of the bonds?

A) Exactly $100,000 because Churchill Company would still pay interest at the face rate of 8%.
B) Less than $100,000 because the market rate of interest at 9% was more than the face rate.
C) Greater than $100,000 because the face rate of interest at 8% was less than the market rate.
D) The bonds would not be sold at all; Churchill Company would have the certificates reprinted bearing the market rate of 9%.

Question 77

Fox Chapel Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year.The market rate of interest is currently 5%.What information is needed in order to determine the selling price?

A) The life of the bonds, the market rate of interest, the bond rating, and the face amount of the bonds.
B) The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.
C) The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life.
D) The face amount of the bonds, the market rate of interest, the purpose of the issue, and the bond life.

Question 78

Flagg Company issued $500,000 of bonds for $498,351, Interest is paid semiannually.The bond markets and the financial press are likely to state the bond issue price as

A) 498.35.
B) 100.00.
C) 99.67.
D) 49.84.

Question 79

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

Question 80

Which of the following trends can be unfavorable from the viewpoint of a bondholder?

A) The issuing company's debt ratio is steadily declining.
B) The issuing company's interest coverage ratio is steadily rising.
C) Market interest rates are steadily rising.
D) The issuing company's net cash flow from operating activities is steadily increasing.