Deck 11: Reporting and Interpreting Stockholders Equity

Question 1

A bond premium can be considered to be

A)a reduction in borrowing cost.
B)unrelated to the borrowing cost.
C)an asset.
D)an increase in the borrowing cost.

Answer 1

A

Question 2

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest)is to be paid in two equal payments after the acquisition date.What is the interest concept that best describes this application?
A.Present value of a single amount.
B.Present value of an annuity.
C.Future value of a single amount.
D.Future value of an annuity.

Answer 2

Bennett Industries purchased a large piece of equipment from Crumpet Company on January 2,20A.Bennett signed a note,agreeing to pay Crumpet $400,000 for the equipment on December 31,20C.The market rate of interest for similar notes was 8%.The present value of $400,000 discounted at 8% for three years is $317,520.On January 2,20A,Bennett recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520.

Question 3

A long-term note may be secured by a document called a

A)premium.
B)debenture.
C)bond.
D)mortgage.

Answer 3

D

Question 4

Positive financial leverage occurs in which of the following situations?

A)Interest payments can be deducted for income tax purposes.
B)The company's after-tax return on total assets is less than the after-tax cost of borrowing.
C)The return to the owners is enhanced through the use of debt financing.
D)Payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.

Question 5

The carrying amount of a bond not issued at face value will always move

A)towards the face value.
B)away from the face value.
C)upwards.
D)downwards.

Question 6

A bond with a face value of $100,000 and a quoted price of 96.50 has a selling price of

A)$96,500.
B)$100,000.
C)$103,359.
D)$90,650.

Question 7

Callable bonds may be which of the following?

A)Turned in for early retirement at the option of the bondholder.
B)Converted to common shares at the option of the bondholder.
C)Called for early retirement at the option of the issuer.
D)Converted to registered bonds at the option of the company president.

Question 8

One thousand bonds with a face value of $1,000 each,are sold at 104.The entry to record the issue is

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 9

Marie is considering several possible investment alternatives.
Required:
1.Calculate the present value of each option assuming Marie can earn 8% on any of the investment funds.
2.Which option results in the greatest financial benefit to Marie?

Question 10

An amount is to be deposited in a savings account at the end of each year in order to provide funds for a trip to Europe at the end of the fourth year.You have been asked to determine the amount of the annual deposit.What is the interest concept that best describes this application?
A.Present value of a single amount.
B.Present value of an annuity.
C.Future value of a single amount.
D.Future value of an annuity.

Question 11

When a company prepares a bond indenture,certain provisions of the bonds are included.Which of the following are not provisions specified in the indenture?

A)Dates of interest payments.
B)Rate of interest to be paid.
C)Cash to be received at the issue date.
D)Maturity date.

Question 12

Bonds payable usually are classified on the statement of financial position as which of the following?

A)Current liabilities.
B)Long-term liabilities.
C)Investments and funds.
D)Current assets.

Question 13

A $100,000 bond was retired at 97 when the carrying amount of the bond was $102,500.The entry to record the retirement would include a

A)gain on bond redemption of $2,500.
B)loss on bond redemption of $2,500.
C)loss on bond redemption of $5,500.
D)gain on bond redemption of $5,500.

Question 14

A $500,000 bond was retired at 97 when the carrying amount of the bond was $495,000.The entry to record the retirement would include a

A)gain on bond redemption of $15,000.
B)loss on bond redemption of $10,000.
C)loss on bond redemption of $15,000.
D)gain on bond redemption of $10,000.

Question 15

As a held-to-maturity investment,Jones Company purchased a $1,000,7% bond of Company Y on January 1,20A.The interest is paid each December 31 and the bonds mature in five years from the acquisition date.Give the journal entry to record the acquisition of the bond under each of the following three assumptions.
The bond sold at par
The bond sold at 103:
The bond sold at 97:

Question 16

Bonds usually are issued to obtain cash for what purpose?

A)Meeting working capital needs.
B)Acquisitions of long-term assets.
C)Purchasing insurance.
D)Investing in short-term marketable securities.

Question 17

The present value of a bond is also known as its

A)face value.
B)future value.
C)issue price.
D)deferred value.

Question 18

Pleasant Company has established a pension plan for its employees that operates as follows: Each year,Pleasant Company places a fixed dollar amount in a pension fund for each employee.The funds are then invested.Upon retirement,each employee is entitled to the cash value of the funds that have been invested in his/her name.This arrangement is an example of which of the following?
A.Defined benefit program.
B.Defined contribution program.
C.Contingent program.
D.Deferred timing program.

Question 19

Calculation of the amount of the equal periodic payments that would be required at the end of each year to accumulate a $20,000 fund at the end of the tenth year is most readily determined by reference to a table that shows which of the following?
A.Future value of $1.
B.Present value of $1.
C.Future value of annuity of $1.
D.Present value of a single sum.

Question 20

In 2012,The W D Co.had total liabilities of $22,704 million and total assets of $43,679 million.In 2011,they had total liabilities of $21,990 million and total assets of $41,378 million.Calculate their debt to equity ratio for 2012 and 2011,respectively.

A).48 and .47
B).52 and .53
C).92 and .88
D)1.08 and 1.13

Question 21

In 2012,H Co's times interest earned ratio was 2.51 while T Co's ratio for that year was .80.Which of the following statements is false?

A)H Co's ratio appears to provide adequate coverage of interest from its present profit.
B)Since H Co's is actively pursuing growth through investment in other companies,its ratio may improve once those investments begin to generate additional profit.
C)T Co's ratio is very low and they present high risk to their creditors and investors.
D)None of the responses is false.

Question 22

On December 31,20A,Dive Company sold $100,000,ten-year,8% bonds at 104.5.The bonds were dated January 1,20A,and interest is payable each June 30 and December 31.The company uses the straight-line amortization method.The company should report the long-term liability (carrying value)for the bonds on the December 31,20A,statement of financial position as which of the following?

A)$100,000
B)$103,400
C)$104,000
D)$104,500

Question 23

Deany Company issued $100,000 bonds.The stated rate of interest was 8% and the market rate 9%.Which of the following statements is true?

A)The bonds were issued at a premium.
B)Annual interest expense will exceed the company's actual cash payments for interest.
C)Annual interest expense will be $8,000.
D)Deany Company cannot issue bonds if the market rate is higher than the stated rate.

Question 24

In 2012,C Co.reported a times interest earned ratio of 12.33 times while P Co.reported a ratio of 11.07 times.Which of the following statements is false?

A)P Co.and C Co.have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels.
B)C Co's ratio is about 11.3% higher than P Co's ratio.
C)C Co.is more liquid than P.Co.
D)Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.

Question 25

Safeway Company issued $100,000 of fixed interest rate bonds payable at 98.At year-end,the bonds were selling in the bond market at 99.What entry would Safeway make at year-end to record the change in selling price?

A)Debit Bonds Payable $1,000; credit Interest Expense $1,000.
B)Debit Interest Expense $1,000; credit Bonds Payable $1,000.
C)Debit Investment in Bonds $1,000; credit Investment Revenue $1,000.
D)No entry needed.

Question 26

When a bond investment is sold (issued)at a discount,subsequent amortization of the discount does which of the following?

A)Decreases interest expense.
B)Increases interest expense.
C)Has no effect upon interest expense.
D)Decreases interest in the bond.

Question 27

Mace Corporation sold (issued)30 of its $1,000 bonds payable,5% annual interest,due in ten years.The bonds were sold at 98.Assume straight-line amortization.What would the interest expense be each full year?

A)$1,100
B)$1,440
C)$1,500
D)$1,560

Question 28

On November 1,20A,Duval Company sold (issued)300,$1,000,ten-year,7% bonds at 97.The bonds were dated November 1,20A,and interest is payable each November 1 and May 1.What would be the amount of discount amortization at each semi-annual interest date (assume straight-line amortization)?

A)$50
B)$100
C)$450
D)$600

Question 29

On July 1,20B,WildWorld Inc.sold (issued)300,$1,000,ten-year,7% bonds at 101.The bonds were dated July 1,20B,and semi-annual interest will be paid each December 31 and June 30.WildWorld uses straight-line amortization.What is the bond liability that would be reported on the statement of financial positionat December 31,20B?

A)$300,000
B)$302,700
C)$302,850
D)$303,000

Question 30

The amortization of bond premium by the issuer will do which of the following?

A)Decrease interest expense.
B)Increase interest expense.
C)Have no effect on interest expense.
D)Determine the cash paid for interest.

Question 31

On January 1,20A,A-Ace Corp.issued $3,000,000 par value 12%,10 year bonds which pay interest each December 31.If the market rate of interest was 14%,what should the issue price of the bonds be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697.The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)

A)$2,686,896
B)$2,843,172
C)$3,000,000
D)$3,339,084

Question 32

On January 1,20A,Washer Company sold (issued)600,$1,000,five-year,8% bonds at 95.The bonds were dated January 1,20A,and interest is payable each June 30 and December 31.The company uses the straight-line method of amortization.What is the amount of the net liability for bonds payable that would be reported on the December 31,20A,statement of financial position?

A)$573,000
B)$576,000
C)$597,000
D)$600,000

Question 33

The times interest earned ratio is calculated by dividing

A)profit by interest expense.
B)profit before income taxes by interest expense.
C)profit before interest expense by interest expense.
D)profit before interest expense and income taxes by interest expense.

Question 34

Johnson Company issued $50,000 bonds payable,9% annual interest,maturity in ten years.The bonds were sold at 96.Johnson uses straight-line amortization.What would the amount of interest expense be each full year?

A)$4,300
B)$4,500
C)$4,680
D)$4,700

Question 35

When a bond is issued at a premium,the amount of interest expense for an interest period is calculated by

A)multiplying the carrying amount times the stated interest rate.
B)multiplying the face amount of the bonds by the stated interest rate.
C)multiplying the face amount of the bonds by the market interest rate.
D)multiplying the carrying amount times the market interest rate.

Question 36

If a bond payable is sold (issued)at a premium,the amount of the carrying value (the long-term liability)reported on the subsequent statements of financial position does which of the following?

A)Remains constant.
B)Decreases each year.
C)Increases each year.
D)Changes from year to year depending upon the market rate of interest each year.

Question 37

One thousand bonds with a face value of $1,000 each,are sold at 104.The entry to record the issue is

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 38

If a bond is sold at 98,its stated rate of interest would be which of the following?

A)Lower than the market rate.
B)Higher than the market rate.
C)Equal to the market rate.
D)Unrelated to the market rate.

Question 39

On July 1,20A,Wilson Company issued $300,000,five-year,9% bonds at 103.The reason Wilson issued the bonds at a premium was which of the following?

A)The stated rate of interest was lower than the rate being paid on investments with comparable risk.
B)The stated rate of interest was the same as the rate being paid on investments with comparable risk.
C)The stated rate of interest was higher than the rate being paid on investments with comparable risk.
D)The bonds were callable.

Question 40

In 2012,P Co reported profit of $1,933 million,interest expense of $395 million and income taxes of $270 million.In 2011,they reported profit of $2,142 million,interest expense of $478 million and income taxes of $818 million.Calculate the times interest earned ratio for 2012 and 2011,respectively.

A)5.05 and 4.48 times
B)6.58 and 7.19 times
C)5.73 and 6.19 times
D)6.05 and 5.48 times

Question 41

If the market rate of interest is 10%,a rational person would just as soon receive $1,100 three years from now as what amount today (round to the nearest dollar)?

A)$783
B)$826
C)$1,000
D)$1,100

Question 42

On January 1,20A,Winston Corporation sold a four-year,$10,000,7% bond.The interest is payable annually each December 31.The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used,the interest expense on the 20A income statement would be which of the following amounts (to the nearest dollar)?

A)$700
B)$773
C)$883
D)$1,547

Question 43

The amortization of a bond discount results in periodic interest expense

A)greater than the constant percentage of the carrying amount of the bonds.
B)less than the constant percentage of the carrying amount of the bonds.
C)equal to the constant percentage of the carrying amount of the bonds.
D)increasing over the term of the bond issue.

Question 44

If there is a loss on bonds redeemed early,it is

A)debited directly to Retained Earnings.
B)reported as "Other Expense" on the income statement.
C)reported as part of profit from operations on the income statement.
D)debited to Interest Expense,as a cost of financing.

Question 45

Which of the following statements is true?

A)The corporation will have cash inflow when bonds are issued for an amount equal to,greater than,or less than the par value of the bonds.
B)The corporation will have to pay cash to bond investors when those investors demand to call the bonds.
C)The corporation will have an outflow of cash connected to an investing activity when interest is paid to bond investors.
D)An outflow of cash when convertible bonds are converted is a financing activity.

Question 46

If there is a loss on bonds redeemed early,it is

A)debited directly to Retained Earnings.
B)reported as "Other Expense" on the income statement.
C)reported as part of profit from operations on the income statement.
D)debited to Interest Expense,as a cost of financing.

Question 47

Calculation of the amount of the equal periodic payments that would be required at the end of each year to accumulate a $20,000 fund at the end of the tenth year is most readily determined by reference to a table that shows which of the following?

A)Future value of $1.
B)Present value of $1.
C)Future value of annuity of $1.
D)Present value of a single sum.

Question 48

There is a reciprocal relationship between which of the following?

A)Present value of the annuity of $1 and the present value of $1.
B)Future value of $1 and the future value of an annuity.
C)Present value of $1 and the future value of $1.
D)Present value of the annuity of $1 and the future value of annuity of $1.

Question 49

If bonds have been issued at a discount,then over the life of the bonds the

A)carrying amount of the bonds will decrease.
B)interest expense will decrease.
C)carrying amount of the bonds will increase.
D)unamortized discount will increase.

Question 50

Which of the following is true?

A)It is common for companies to both retire debt and issue new bonds in the same year as a way to replace higher interest rate debt with lower rate issuances.
B)Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.
C)Retractable bonds require cash outflow connected to investing when the issuing corporation redeems the bonds.
D)The corporation will have to pay cash to bond investors when those investors demand to call the bonds.

Question 51

Present value can be defined as which of the following?

A)Future amount of a sum of money held now.
B)Value today of future cash inflow(s).
C)Maturity value of a debt.
D)Sum of cash inflows over a future period of time.

Question 52

Bond discounts should be amortized to comply with the

A)cost principle.
B)matching principle.
C)revenue recognition principle.
D)full disclosure principle.

Question 53

If bonds have been issued at a discount,then over the life of the bonds the

A)carrying amount of the bonds will decrease.
B)carrying amount of the bonds will increase.
C)interest expense will decrease.
D)unamortized discount will increase.

Question 54

Pleasant Company has established a pension plan for its employees that operates as follows: Each year,Pleasant Company places a fixed dollar amount in a pension fund for each employee.The funds are then invested.Upon retirement,each employee is entitled to the cash value of the funds that have been invested in his/her name.This arrangement is an example of which of the following?

A)Defined benefit program.
B)Defined contribution program.
C)Contingent program.
D)Deferred timing program.

Question 55

Accurate Numbers,Inc.,issued $100,000 of 10 year,12% bonds dated April 1,20A,for $102,360 on April 1,20A.The bonds pay interest on April 1 and October 1.Straight-line amortization is used by the company.What entry is needed at October 1 for the first interest payment?

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 56

On November 1,20A,Katz Company purchased twenty $1,000,9% bonds (interest is payable each April 30,and October 31)at 97.What is the amount that should be recorded in the long-term investment account on November 1,20A?

A)$18,800
B)$19,400
C)$20,000
D)$20,600

Question 57

Which of the following is true?

A)An outflow of cash for interest payments is an investing activity.
B)An outflow of cash when convertible bonds are converted is an investing activity.
C)An outflow of cash when callable bonds are recalled by the issuer is a financing activity.
D)Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.

Question 58

On January 1,20A,Ross Company acquired a truck that had a purchase price of $20,000.The seller agreed to allow Ross to pay for the truck over a two-year period at 10% interest with equal payments due at the end of 20A and 20B.What is the amount of each annual payment the company must make (round to the nearest dollar)?

A)$11,524
B)$14,151
C)$17,751
D)$22,267

Question 59

On the maturity date of bonds payable after interest has been paid,the issuing company will do which of the following?

A)Record a loss of the market rate of interest on the maturity date exceeds the stated rate of interest.
B)Pay bondholders the original amount the bondholders paid to purchase the bonds.
C)Debit Bonds Payable and credit Cash for the par value of the bonds.
D)Debit Cash and credit Bonds Payable for the carrying amount of the bonds.

Question 60

You have been asked to compute the amount of a fund that will be available at the end of three years as a result of a single sum of $1,000 that is deposited.What is the interest concept that best describes this application?

A)Present value of a single amount.
B)Present value of an annuity.
C)Future value of a single amount.
D)Future value of annuity.

Question 61

Kristen's grandmother promises to give her $3,000 at the end of three years and $4,000 at the end of four years.How much is the money worth today if Kristen could earn 6% annual interest on the funds?

A)$5,545
B)$5,687
C)$16,237
D)$21,879

Question 62

Long-term debt carries additional risk because interest and principal payments are not discretionary.

Question 63

Kristen deposits $5,000 in the bank today.She will be earning 6% interest annually on her deposit.How much money will she have in the bank at the end of 5 years? (Round to the nearest dollar).

A)$3,736
B)$6,691
C)$21,062
D)$28,186

Question 64

On Bennett's 20A year-end statement of financial position,the book value of the liability for notes payable related to this purchase would equal which of the following?

A)$317,520
B)An amount less than $317,520.
C)An amount more than $317,520.
D)An amount more or less than $317,520 depending upon Bennett's income for the year.

Question 65

On December 31,20A,Bennett recorded an adjusting entry to account for interest that had accrued on the note.What is the approximate amount of interest expense that would have accrued at December 31,20A?

A)$25,400
B)$32,000
C)$76,200
D)$96,000

Question 66

A characteristic of a callable bond is the payment of the principal by the issuing corporation in instalments on several specified dates.

Question 67

On January 1,20A,Tie Company purchased a machine that had a sticker (list)price of $22,000.The seller agreed to allow Tie Company to pay for the machine over a three-year period at 10% interest on the unpaid balance and with equal payments of $8,444 due at the end of 20A,20B,and 20C.What is the amount that should be debited to the asset account,Machinery,on the day the contract was initiated is (rounded to the nearest dollar)?

A)$20,999
B)$22,000
C)$25,332
D)$27,865

Question 68

Kristen deposits $5,000 in the bank at the end of each year for five years.How much money will she have in the bank at the end of five years,assuming she will be earning 6% interest annually on her deposits? (Round to the nearest dollar).

A)$3,736
B)$6,691
C)$21,062
D)$28,186

Question 69

Accrued interest was recorded annually.On December 31,20C,the due date of the note,Bennett paid the amount due and recorded the transaction with which of the following?

A)A debit to notes payable for $400,000.
B)A debit to notes payable for $317,520.
C)A credit to notes payable for $400,000.
D)A credit to notes payable for $317,520.

Question 70

A callable bond grants the option to the bondholder of electing to turn the bond in for early retirement.

Question 71

How much would Kristen have to deposit in the bank today if she will be earning a 6% annual rate of return and wants to have $5,000 in the bank at the end of five years? (Round to the nearest dollar).

A)$3,736
B)$4,212
C)$4,737
D)$5,637

Question 72

Kristen's grandmother promises to give her $1,000 at the end of each of the next five years.How much is the money worth today,assuming Kristen could invest the money and earn a 6% annual rate of return? (Round to the nearest dollar).

A)$747
B)$1,338
C)$4,212
D)$5,637

Question 73

How much would Kristen have to deposit in the bank at the end of each of the next five years if she wishes to have $5,000 in the bank at the end of that time period,assuming she will be earning 6% annual rate of return? (Round to the nearest dollar).

A)$887
B)$943
C)$1,000
D)$1,187

Question 74

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest)is to be paid in two equal payments after the acquisition date.What is the interest concept that best describes this application?

A)Present value of a single amount.
B)Present value of an annuity.
C)Future value of a single amount.
D)Future value of an annuity.

Question 75

Bonds often are a superior method of financing in comparison with sale and issuance of capital shares because of both the (a)leverage effects and (b)tax deductibility of interest payments.

Question 76

An amount is to be deposited in a savings account at the end of each year in order to provide funds for a trip to Europe at the end of the fourth year.You have been asked to determine the amount of the annual deposit.What is the interest concept that best describes this application?

A)Present value of a single amount.
B)Present value of an annuity.
C)Future value of a single amount.
D)Future value of an annuity.

Question 77

An unsecured bond usually is called an indenture.

Question 78

The use of financial leverage by a company does not result in increased risk for its investors.

Question 79

Kristen's grandmother promises to give her $1,000 at the end of five years.How much is the money worth today,assuming Kristen could invest the money and earn a 6% annual rate of return? (Round to the nearest dollar).

A)$747
B)$1,338
C)$4,212
D)$5,637

Question 80

On January 1,20A,Goldstein Company purchased a machine.The seller agreed that a total of $9,000 would be paid over a three-year period--$3,000 per year at the end of 20A,20B,and 20C.At the time the machine was purchased,the market rate of interest was 10%.What amount should be debited to the asset account,Machinery,on the date of purchase (round to the nearest dollar)?

A)$7,461
B)$9,000
C)$9,016
D)$9,948