Deck 10: Reporting and Analyzing Long-Term Liabilities

Question 1

There are two common payment patterns for installment notes: (1)accrued interest plus equal principal payments and (2)equal payments.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Bonds may only be issued on an interest payment date.

Question 6

If a bond's interest period does not coincide with the issuing company's accounting period,an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Question 7

A basic present value concept is that cash received in the future is worth more value than the same amount of cash received today.

Question 8

If the borrower fails to pay a mortgage,most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

Question 9

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

Question 10

The type of bond that provides the greatest security from theft of loss is the debenture.

Question 11

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 12

The present value of an annuity factor for 6 years at 10% is 4.3553.This implies that an annuity of six $2,000 payments at 10% would equal $8,711.

Question 13

A basic present value concept is that cash in the future is worth less than the same amount of cash today.

Question 14

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 15

The present value of an annuity can be computed as the sum of the individual future values for each payment.

Question 16

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 17

Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.

Question 18

A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

Question 19

An advantage of bonds is that interest does not have to be paid.

Question 20

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

Question 21

A bond listed at 103 on a stock exchange is selling at 103% of its par value.

Question 22

The payment pattern for installment notes that consists of accrued interest plus equal amounts of principal yields cash flows of equal amounts over the life of the note.

Question 23

The debt to equity ratio is calculated by dividing total company's liabilities by the company's total assets.

Question 24

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

Question 25

The effective interest method yields increasing amounts of bond interest expense and decreasing amount of premium amortization over the life of the bond .

Question 26

The carrying value of a long-term note payable:

A)Is computed as the future value of all remaining future payments,using the market rate as interest
B)Is the face value of the long-term note less the total of all future interest payments
C)Is computed as the present value of all remaining future payments,discounted using the market rate of interest at the time of issuance
D)Is computed as the present value of all remaining interest payments,discounted using the note's rate of interest
E)Decreases each time period the discount on the note is amortized

Question 27

Premium on Bonds Payable is an increase to the liability account.

Question 28

The debt to equity ratio helps assess the risks of a company's financing structure.

Question 29

Installment notes payable that require periodic payments of accrued interest plus equal amounts of principal result in:

A)Periodic total payments that gradually decrease in amount
B)Periodic total payments that are equal
C)Periodic total payments that gradually increase in amount
D)Increasing amounts of interest each period
E)Increasing amounts of principal each period

Question 30

To provide security to creditors and to reduce interest costs,bonds and notes payable can be secured by:

A)Safe deposit boxes
B)Mortgages
C)Equity
D)The FASB
E)Debentures

Question 31

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

Question 32

GAAP criteria for identifying a lease as a capital lease are more general than the criteria under IFRS.

Question 33

A company borrowed $300,000 cash from the bank by signing a 5-year,8% installment note.The present value factor for an annuity at 8% for 5 years is 3.9927.Each annuity payment equals $75,137.The present value of the note is:

A)$75,137
B)$94,013
C)$300,000
D)$375,685
E)$1,197,810

Question 34

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

Question 35

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

Question 36

A company borrowed $50,000 cash from the bank and signed a 6-year note at 7%.The present value factor for an annuity for 6 years at 7% is 4.7665.The annual annuity payments equal $10,490.The present value of the loan is:

A)$10,490
B)$11,004
C)$50,000
D)$52,450
E)$238,325

Question 37

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

A)Debentures
B)Discounted notes
C)Installment notes
D)Indentures
E)Investment notes

Question 38

A company must repay the bank $10,000 cash in 3 years for a loan.The loan agreement specifies 8% interest compounded annually.The present value factor for 3 years at 8% is 0.7938.The present value of the loan is:

A)$10,000
B)$12,400
C)$7,938
D)$9,200
E)$7,600

Question 39

A company with liabilities of $2,816,000 and equity of $826,000 has a debt to equity ratio equal to 29.33%

Question 40

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

Question 41

Secured bonds:

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

Question 42

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

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

Question 43

Operating leases differ from capital leases in that

A)For a capital lease the lessee records the lease payments as rent expense,but for an operating lease the lessee reports the lease payments as depreciation expense
B)For an operating lease the lessee depreciates the asset acquired under lease,but for the capital lease the lessee does not
C)Operating leases create a long-term liability on the balance sheet,but capital leases do not
D)Operating leases do not transfer ownership of the asset under the lease,but capital leases often do
E)Operating lease payments are generally greater than capital lease payments

Question 44

What is the debt to equity ratio for a company who has $700,000 in total liabilities and $3,500,000 in total equity?

A)20%
B)5
C)$2,100,000
D)2%
E).5

Question 45

A bondholder that owns a $1,000,10%,10-year bond has:

A)Ownership rights
B)The right to receive $10 per year until maturity
C)The right to receive $1,000 at maturity
D)The right to receive $10,000 at maturity
E)The right to receive dividends of $1,000 per year

Question 46

If an issuer sells a bond at any other date than the interest payment date:

A)This means the bond sells at a premium
B)This means the bond sells at a discount
C)The issuing company will report a loss on the sale of the bond
D)The issuing company will report a gain on the sale of the bond
E)The buyer normally pays the issuer the purchase price plus any interest accrued since the prior interest payment date

Question 47

When a bond sells at a premium:

A)The contract rate is above the market rate
B)The contract rate is equal to the market rate
C)The contract rate is below the market rate
D)It means that the bond is a zero coupon bond
E)The bond pays no interest

Question 48

A bond sells at a discount when the:

A)Contract rate is above the market rate
B)Contract rate is equal to the market rate
C)Contract rate is below the market rate
D)Bond has a short-term life
E)Bond pays interest only once a year

Question 49

Bonds that have interest coupons attached to their certificates,which the bondholders detach during each interest period and present to a bank for collection,are called:

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

Question 50

A company issues at par 7% bonds with a par value of $500,000 on June 1,which is 5 months after the most recent interest date.How much total cash interest is received on May 1 by the bond issuer?

A)$0
B)$2,916.66
C)$100,000.00
D)$14,583.33
E)$35,000.00

Question 51

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value factor for an annuity for 7 years at 9% is 5.0330.The present value of the loan is:

A)$9,000
B)$5,033
C)$63,000
D)$57,330
E)$45,297

Question 52

A company issues at 9% bonds at par with a par value of $100,000 on April 1,which is 4 months after the most recent interest date.How much total cash interest is received on April 1 by the bond issuer?

A)$750
B)$5,250
C)$1,500
D)$3,000
E)$6,000

Question 53

Bonds with a par value of less than $1,000 are known as:

A)Junk bonds
B)Baby bonds
C)Callable bonds
D)Unsecured bonds
E)Convertible bonds

Question 54

The contract between the bond issuer and the bondholders,which identifies the rights and obligations of the parties is called a(n):

A)Debenture
B)Bond indenture
C)Mortgage
D)Installment note
E)Mortgage contract

Question 55

Sinking fund bonds:

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

Question 56

Mark and Holly Melton,the owners of Melton Franchise Systems,say the key to their success is planning the financing for each individual franchise owner.Using the debt to equity ratio,which of the following franchises would be assessed as having the riskiest financing structure?
$$\begin{array} { | l | c | c | c | c | c | } \hline & \text { Franchise } & \text { Franchise } & \text { Franchise } & \text { Franchise } & \text { Franchise } \\& \text { A } & \text { B } & \text { C } & \text { D } & \text { E } \\\hline \text { Total Lubilities } & \$ 240,000 & \$ 120,000 & \$ 300,000 & \$ 500,000 & \$ 270,000 \\\hline \text { Total Equity } & \$ 60,000 & \$ 20,000 & \$ 150,000 & \$ 100,000 & \mathbf { \$ 9 0 , 0 0 0 } \\\hline\end{array}$$

A)Franchise A
B)Franchise B
C)Franchise C
D)Franchise D
E)Franchise E

Question 57

Which of the following statements is true?

A)Interest on bonds is tax deductible
B)Interest on bonds is not tax deductible
C)Dividends to stockholders are tax deductible
D)Bonds do not have to be repaid
E)Bonds always decrease return on equity

Question 58

Bonds that mature at different dates and end up with the total principal repaid gradually over a number of periods are referred to as:

A)Registered bonds
B)Bearer bonds
C)Callable bonds
D)Sinking fund bonds
E)Serial bonds

Question 59

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

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

Question 60

A bond traded at 102 ½ means that:

A)The bond pays 2.5% interest
B)The bond traded at $1,025 per $1,000 bond
C)The market rate of interest is 2.5%
D)The bonds were retired at $1,025 each
E)The market rate of interest is 2 ½% above the contract rate

Question 61

A company issued 5-year,7% bonds with a par value of $100,000.The market rate when the bonds were issued was 6.5%.The company received $101,137 cash for the bonds.Using the straight-line method,the amount of recorded interest expense for the first semiannual interest period is:

A)$3,386.30
B)$3,500.00
C)$3,613,70
D)$6,633.70
E)$7,000.00

Question 62

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000.The difference between par value and issue price for this bond is recorded as a:

A)Credit to Interest Income
B)Credit to Premium on Bonds Payable
C)Credit to Discount on Bonds Payable
D)Debit to Premium on Bonds Payable
E)Debit to Discount on Bonds Payable

Question 63

On January 1,2010,a company issued and sold a $400,000,7%,10-year bond payable and received proceeds of $396,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

A)
$$\begin{array} { | l | r | r | } \hline \text { Bond Interest Expense } & 14,000 & \\\hline \text { Cash } & & 14,000 \\\hline\end{array}$$
B)
$\begin{array}{|l|r|r|}\hline \text { Bond Interest Expense } & 28,000 & \\\hline \text { Cash } & & 28,000 \\\hline\end{array}$
C)
$\begin{array}{|l|r|r|}\hline\text { Bond Interest Expense } & 14,200 & \\\hline \text { Cash } & & 14,000 \\\hline \text { Discount on Bonds Payable } & & 200\\\hline\end{array}$
D)
$$\begin{array} { | l | r | r | } \hline \text { Bond Interest Expense } & 13,800 & \\\hline \text { Discount on Bonds Payable } & 200 & \\\hline \text { Cash } & & 14,000 \\\hline\end{array}$$
E)
$$\begin{array} { | l | r | r | } \hline \text { Bond Interest Experise } & 14,000 & \\\hline \text { Discount on Bonds Payable } & 200 & \\\hline \text { Cash } & & 14,200 \\\hline\end{array}$$

Question 64

A company issues 9%,20-year bonds with a par value of $750,000.The current market rate is 9%.The amount of interest owed to the bondholders for each semiannual interest payment is.

A)$0
B)$33,750
C)$67,500
D)$750,000
E)$1,550,000

Question 65

A discount on bonds payable:

A)Occurs when a company issues bonds with a contract rate less than the market rate
B)Occurs when a company issues bonds with a contract rate more than the market rate
C)Increases the Bond Payable account
D)Decreases the total bond interest expense
E)Is not allowed in many states to protect creditors

Question 66

A company issued 10%,5-year bonds with a par value of $400,000.The market rate when the bonds were issued was 8%.The company received $432,458 cash for the bonds.Using the effective interest method,the amount of interest expense for the first semiannual interest period is:

A)$21,622.90
B)$20,000.00
C)$4,324.58
D)$17,298.32
E)$16,000.00

Question 67

On January 1,2010,a company issued and sold an $850,000,6%,5-year bond payable and received proceeds of $825,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The journal entry to record the first interest payment is:

A)
$$\begin{array} { | l | c | c | } \hline \text { Bond Interest Expense } & 25,500 & \\\hline \text { Cash } & & 25,500 \\\hline\end{array}$$
B)
$$\begin{array} { |l | r | r | } \hline \text { Bond Interest Expense } & 51,000 & \\\hline \text { Cash } & & 51,000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | r | r | } \hline \text { Bond Interest Expense } & 28,000 & \\\hline \text { Discount on Bonds Payable } & & 2,500 \\\hline \text { Cash } & & 25,500 \\\hline\end{array}$$
D)
$$\begin{array} { | l | r | r | } \hline \text { Bond Interest Expense } & 23,000 & \\\hline \text { Discount on Bonds Payable } & 2,500 & \\\hline \text { Cash } & & 25,500 \\\hline\end{array}$$
E)
$$\begin{array} { | l | r | r | } \hline \text { Bond Interest Experise } & 25,500 & \\\hline \text { Discount on Bonds Payable } & 2,500 & \\\hline \text { Cash } & & 28,000 \\\hline\end{array}$$

Question 68

A company issued 7-year,8% bonds with a par value of $200,000.The market rate when the bonds were issued was 5.5%.The company received $203,010 cash for the bonds.Using the straight-line method,the amount of recorded interest expense for the first semiannual interest period is:

A)$8,000
B)$8,215
C)$7,785
D)$16,000
E)$4,990

Question 69

The Premium on Bonds Payable account is a(n):

A)Revenue account
B)Adjunct or accretion liability account
C)Contra revenue account
D)Asset account
E)Contra expense account

Question 70

The market value of a bond is equal to:

A)The present value of all future cash payments provided by a bond
B)The present value of all future interest payments provided by a bond
C)The present value of the principal for an interest-bearing bond
D)The future value of all future cash payments provided by a bond
E)The future value of all future interest payments provided by a bond

Question 71

Amortizing a bond discount:

A)Allocates a part of the total discount to each interest period
B)Increases the market value of the Bonds Payable
C)Decreases the Bonds Payable account
D)Decreases interest expense each period
E)Increases cash flows from the bond

Question 72

A company issued 7%,5-year bonds with a par value of $100,000.The market rate when the bonds were issued was 7.5%.The company received $97,947 cash for the bonds.Using the effective interest method,the amount of interest expense for the first semiannual interest period is:

A)$3,500.00
B)$3,673.01
C)$3,705.30
D)$7,000.00
E)$7,346.03

Question 73

A company issued 10-year,8% bonds with a par value of $200,000.The company received $190,000 for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

A)$8,000.00
B)$8,500.00
C)$16,000.00
D)$7,500.00
E)$18,000.00

Question 74

A company issued 8%,15-year bonds with a par value of $550,000.The current market rate is 8%.The journal entry to record each semiannual interest payment is:

A)
$\begin{array}{|c|r|r|}\hline\text { Bond Interest Expense } & 22,000 & \\\hline \text { Cash } & & 22,000\\\hline\end{array}$
B)
$$\begin{array} { | l | c | c | } \hline \text { Bond Interest Expense } & 44,000 & \\\hline \text { Cash } & & 44,000 \\\hline\end{array}$$
C)
$$\begin{array} { | l | c | c | } \hline \text { Bond Interest Expense } & 555,000 & \\\hline \text { Cash } & & 555,000 \\\hline\end{array}$$
D)
$$\begin{array} { | l| c | c | } \hline \text { Bond Interest Expense } & 660,000 & \\\hline \text { Bond Payable } & & 660,000 \\\hline\end{array}$$
E)No entry is needed,since no interest is paid until the bond is due

Question 75

The Discount on Bonds Payable account is:

A)A liability
B)A contra liability
C)An expense
D)A contra expense
E)A contra equity

Question 76

Adidas issued 10-year,8% bonds with a par value of $200,000,where interest is paid semiannually.The market rate on the issue date was 7.5%.Adidas received $206,948 in cash proceeds.Which of the following statements is true?

A)Adidas must pay $200,000 at maturity and no interest payments
B)Adidas must pay $206,948 at maturity and no interest payments
C)Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each
D)Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each
E)Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each

Question 77

A company issued 5-year,7% bonds with a par value of $100,000.The company received $97,947 for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

A)$3,294.70
B)$3,500.00
C)$3,705.30
D)$7,000.00
E)$7,410.60

Question 78

A company issued 25-year,8% bonds with a par value of $900,000.The company received $1,000,000 cash for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

A)$36,000
B)$34,000
C)$38,000
D)$40,000
E)$32,000

Question 79

Which of the following is true regarding the effective interest amortization method?

A)Allocates bond interest expense using a changing interest rate
B)Allocates bond interest expense using a constant interest rate
C)Allocates a decreasing amount of interest over the life of a discounted bond
D)Allocates bond interest expense using the current market rate for each period
E)Is not allowed by the FASB

Question 80

A company issued 18-year,6% bonds with a par value of $750,000.The company received $761,736 cash for the bonds.Using the straight-line method,the amount of interest expense for the first semiannual interest period is:

A)$22,174
B)$22,826
C)$22,500
D)$23,152
E)$21,848