Deck 10: Long-Term Liabilities

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

The issue price of a bond is always calculated at present value using the market rate of interest.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

Discount on Bonds Payable is classified as a current liability.

Question 11

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

Question 12

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 13

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

Question 14

Convertible bonds normally sell at a higher price than nonconvertible bonds.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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

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

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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 33

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

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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 a future time.
D)the issuing company cannot retire the bonds before maturity.

Question 42

On January 2,2017,Roof Master Construction,Inc.issued $500,000,ten-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 43

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 44

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 45

Bonds in the amount of $100,000 with a life of ten years were issued by 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 46

Which of the following items should not appear in the Long-Term Liability section of the balance sheet?

A)Accrued income taxes
B)Capital lease with a ten-year term
C)Bonds payable
D)Pension obligations

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 asset

Question 48

Which of the following statements regarding serial bonds is true?

A)They are the most common type of bond issued.
B)They have shorter lives than term bonds.
C)They are always backed by the issuer's collateral.
D)The bonds do not all mature on the same date.

Question 49

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

Question 50

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 51

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 52

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 53

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 54

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 55

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,for example,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 56

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

Question 57

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 58

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

Question 59

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 60

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

Question 61

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 62

Bennington Corp.issued a $40,000,ten-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 63

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 in dollars?

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

Question 64

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 65

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 66

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 67

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 68

The Premium on Bonds Payable account is shown on the balance sheet as a(n)

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

Question 69

The Discount on Bonds Payable account is shown on the balance sheet as a(n)

A)asset.
B)expense.
C)long-term liability.
D)contra long-term liability.

Question 70

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 three years of interest.

Question 71

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 at the time.However,before the bonds could be issued,economic conditions forced the market rate up to 9%.If the life of the bonds is six years and interest is paid annually on December 31,how much will Churchill receive from the sale of the bonds?

A)Churchill will receive exactly $100,000 because it would still pay interest at the face rate of 8%.
B)Churchill will receive less than $100,000 because the market rate of interest at 9% was more than the face rate.
C)Churchill will receive 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 72

Which of the following statements about bonds is correct?

A)The cash interest paid is calculated as the bond face value × the effective rate of interest.
B)The cash interest paid is calculated as the bond face value × the face rate of interest.
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 73

Which of the following statements is correct?

A)Bonds are issued at a price calculated by using the present value of 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 74

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%,seven-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 75

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.

Question 76

Fox Chapel Company wishes to issue $400,000 of five-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 rating
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 77

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 78

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 79

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 80

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