Deck 11: Long-Term Liabilities

Question 1

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

Answer 1

True

Question 2

An operating lease represents both an asset and a liability.

Answer 2

False

Question 3

The debt to equity ratio is expressed as a percent.

Answer 3

True

Question 4

Under a defined contribution pension plan,retirement benefits are based entirely on the annual contribution to the fund plus earnings thereon.

Question 5

Accounting for operating leases can be thought of as similar to accounting for mortgage payments.

Question 6

Interest on debt is tax-deductible to the issuing corporation,whereas dividends on stock are not.

Question 7

The higher the debt to equity ratio,the greater the financial risk the company is taking.

Question 8

Bondholders share voting rights with stockholders.

Question 9

Failure to make interest payments on debt can force a company into bankruptcy.

Question 10

Costs of postretirement benefits other than pension plans should be expensed when paid to the retired employee.

Question 11

Financial leverage is also known as trading on the debt.

Question 12

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

Question 13

The interest coverage ratio measures the degree of protection a company has from default on interest payments.

Question 14

Accounting for a defined benefit pension plan is more complex than accounting for a defined contribution plan.

Question 15

Entering into a capital lease is an example of off-balance-sheet financing.

Question 16

The practice of off-balance-sheet financing is legal.

Question 17

The interest coverage ratio is expressed in times.

Question 18

Financial leverage refers to the issuance of stock to raise cash.

Question 19

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

Question 20

Leases of short-term assets are capital leases,and leases of long-term assets are operating leases.

Question 21

When the terms of a lease require that the lessee record an asset and a liability,the two accounts are recorded at the present value of the total lease payments required.

Question 22

When earnings from an investment exceed the interest payments on the investment,negative financial leverage has occurred.

Question 23

Under a capital lease,each monthly payment is debited by the lessee to Rent Expense.

Question 24

As the interest coverage ratio increases,the risk for creditors decreases.

Question 25

A bond agreement is referred to as the premium.

Question 26

Unamortized Bond Discount is a contra-asset account.

Question 27

Unamortized Bond Premium is subtracted from Bonds Payable on the balance sheet.

Question 28

When a monthly mortgage payment is made and recorded,the debit to Mortgage Payable represents the reduction in the principal balance.

Question 29

The convertibility feature of a bond can be exercised by the issuing corporation.

Question 30

Secured bonds are also known as debentures.

Question 31

Deferred income taxes arise when accounting methods used for financial reporting differ from those used on the income tax return.

Question 32

Under a capital lease,the lessee records both an asset and a liability.

Question 33

The callable feature of a bond can be exercised by the issuer.

Question 34

In a monthly mortgage payment,a smaller amount is devoted to interest expense than in the previous month's payment.

Question 35

The more debt securities a corporation issues,the greater the risk of default.

Question 36

Under a capital lease,the lessor,not the lessee,should record depreciation.

Question 37

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the bond will probably be sold at a premium.

Question 38

Interest on bonds usually is paid annually.

Question 39

Bondholders are debtors of the issuing corporation.

Question 40

Face interest rate is another term for market interest rate.

Question 41

A corporation probably does not know who owns its coupon bonds.

Question 42

When the present value of a bond issue is calculated,the discount rate used should equal the face interest rate of the bonds.

Question 43

If the face interest rate at the date of bond issuance exceeds the market interest rate,the bond will probably be sold at a discount.

Question 44

When the present value of a bond issue is calculated,both the present value of a single sum table and the present value of an annuity table must be used.

Question 45

The convertible feature of bonds is useful if a company wants to retire a bond issue.

Question 46

Bond issue costs have the effect of increasing a premium,or reducing a discount,on bonds issued.

Question 47

When all the bonds of an issue mature at the same time,they are called serial bonds.

Question 48

The call price of bonds is usually below face value.

Question 49

Once a corporation issues bonds,it need only pay interest to the bondholders over the life of the bonds,usually semi-annually,and not repay principal of the bonds at maturity.

Question 50

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the present value of the face value plus the present value of all the future interest payments will equal an amount greater than the face value of the bond.

Question 51

The carrying amount always approaches the face value over the life of the bond.

Question 52

An $160,000 bond issue priced at 97-3/4 is sold for $156,400.

Question 53

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970,the market interest rate at the date of issuance must have been greater than 7 percent.

Question 54

The market interest rate is also called the face interest rate.

Question 55

The par value of a bond is equal to its market value.

Question 56

Discounts or premiums are contra-accounts that are subtracted from or added to bonds payable on the balance sheet.

Question 57

The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments.

Question 58

Most bonds issued today are coupon bonds rather than registered bonds.

Question 59

Bond certificates are issued to the issuing corporation by the SEC.

Question 60

If a bond has a face interest rate of 6 percent,a face value of $40,000,and pays interest semi-annually,each interest payment will amount to $2,400.

Question 61

The effective interest method produces a constant dollar amount of bond interest expense to be reported each interest period.

Question 62

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

Question 63

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value,a gain will result.

Question 64

The debt to equity ratio is expressed in terms of

A) a percentage.
B) dollars.
C) units.
D) times.

Question 65

The present value of a bond can be more or less than the face value of the bond.

Question 66

The amount of unamortized discount at the end of an interest period is equal to the amount of the unamortized discount at the beginning of the period minus the amount of discount that was amortized during the period.

Question 67

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

Question 68

Under the effective interest method of amortizing a bond discount,the bond interest expense recorded for each period increases over the life of the bond.

Question 69

When bonds are converted to stock,any excess carrying value of the bonds over the par value of the stock is to be recorded as Capital Stock.

Question 70

The calculation of cash for interest to be paid each interest period in connection with a bond payable is influenced by any premium or discount upon issuance.

Question 71

When a bond has been issued at a discount,the carrying value at the end of one period is equal to the carrying value at the beginning of the period plus the amount of discount that was amortized during the period.

Question 72

Whether a bond is sold at a discount or a premium,its carrying value will not equal its face value on the maturity date.

Question 73

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.

Question 74

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

Question 75

When a bond issue is converted into common stock,total contributed capital is increased by the face value of the bonds converted.

Question 76

It is the bondholder rather than the issuer who may exercise the call feature of a callable bond.

Question 77

Issuing bonds at a discount has the effect of decreasing interest expense below the face amount of interest.

Question 78

When bonds are converted to stock,no gain or loss is recognized.

Question 79

The carrying value of a bond issued at a premium is calculated at any given point in time by adding the balance of the unamortized premium from the bond's face value.

Question 80

When the effective interest method of amortization is used,the amount of bond interest expense for a given period is calculated by multiplying the market interest rate by the bond's carrying value at the beginning of the given period.