Deck 9: Long-Term Liabilities

Question 1

Term bonds require payments in installments over a series of years.Term bonds require payment of the full principal amount of the bond at a single maturity date.

Answer 1

False

Question 2

Serial bonds require payment of the full principal amount of the bond at a single maturity date.Serial bonds require payments in installments over a series of years.

Answer 2

False

Question 3

Bonds are the most common form of corporate debt.

Answer 3

True

Question 4

Secured bonds are backed by the federal government.Secured bonds are supported by specific assets the issuer has pledged as collateral.

Question 5

A private placement is when a company chooses to sell the debt securities directly to a single investor.

Question 6

Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a lower interest rate for borrowing.Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing.

Question 7

We can calculate the issue price of a bond as the face amount plus the total periodic interest payments.We can calculate the issue price of a bond as the present value of the face amount plus the present value of the periodic interest payments.The market rate of interest is used to calculate the present value.

Question 8

A callable bond allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.

Question 9

Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance.

Question 10

Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the asset temporarily.

Question 11

Interest expense incurred when borrowing money,as well as dividends paid to stockholders,are tax-deductible.Interest expense incurred when borrowing money is tax deductible,while dividends paid to stockholders are not tax-deductible.

Question 12

The market interest rate does not change over time.Market rates change continuously.Announcements by the Federal Reserve regarding its intentions to increase the federal funds rate,political unrest,an increase in the price of oil,and fears of growing inflation can all cause an increase in market interest rates.

Question 13

Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

Question 14

The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

Question 15

Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.Capital leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

Question 16

Unsecured bonds are not backed by a specific asset.

Question 17

The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest.

Question 18

As a company's level of debt increases,bankruptcy risk increases.

Question 19

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

Question 20

The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Question 21

The market value of bonds moves in the opposite direction of interest rates.

Question 22

The stated interest rate does not change over time.

Question 23

When bonds are issued at a premium (above face amount),the carrying value and the corresponding interest expense increase over time.When bonds are issued at a premium (above face amount),the carrying value and the corresponding interest expense decrease over time.

Question 24

A gain or loss is recorded on bonds retired at maturity.No gain or loss is recorded on bonds retired at maturity,as the carrying value at maturity is equal to the face amount of the bond.

Question 25

The cash payment each period is calculated as the carrying value times the market rate.The cash payment each period is calculated as the face value times the stated interest rate.

Question 26

An amortization schedule provides a summary of the cash interest payments,interest expense,and changes in carrying value for each period.

Question 27

The lower the market interest rate,the lower the bond issue price will be.The higher the market interest rate,the lower the bond issue price will be.

Question 28

When bonds are issued at a discount (below face amount),the carrying value and the corresponding interest expense increase over time.

Question 29

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.

Question 30

Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement.Gains/losses on the early extinguishment of debt are reported as non-operating items in the income statement.

Question 31

At the maturity date,the carrying value will equal the face amount of the bond.

Question 32

For bonds issued at a premium,the difference between interest expense and the cash paid increases the carrying value of the bonds.For bonds issued at a premium,the difference between interest expense and the cash paid decreases the carrying value of the bonds.

Question 33

Bonds issued below face amount are said to be issued at a discount.

Question 34

Losses have the effect of reducing net income,while gains increase net income.

Question 35

A premium occurs when the issue price of a bond is above its face amount.

Question 36

As a company's default risk increases,investors demand a higher market interest rate on their bond investments.

Question 37

Interest expense is calculated as the carrying value times the market rate.

Question 38

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

Question 39

When an issuer retires debt of any type before its scheduled maturity date,the transaction is an early extinguishment of debt.

Question 40

Leverage enables a company to earn a higher return using debt than without debt.

Question 41

Which of the following is not a primary source of corporate debt financing?

A)Bonds Payable.
B)Common Stock.
C)Leases.

Question 42

The entry to record a monthly payment on an installment note such as a car loan:

A)Increases expense,decreases liabilities,and decreases assets.
B)Increases expense,increases liabilities,and increases assets.
C)Increases expense,decreases liabilities,and increases assets.

Question 43

How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

A)The final carrying value is zero in an amortization schedule for an installment note.
B)The final carrying value is zero in an amortization schedule for bonds.
C)The final carrying value is zero in both amortization schedules.

Question 44

Which of the following leases is just like a rental?

A)An operating lease.
B)A capital lease.
C)Both an operating and a capital lease.

Question 45

Which of the following is a reason why some companies lease rather than buy?

A)Leasing may allow you to borrow with little or no down payment.
B)Leasing can improve the balance sheet by reducing long-term debt.
C)Leasing can lower income taxes.
D)All of the above

Question 46

For a five-year installment note signed on January 1,2016,at which of the following dates would the carrying value be the lowest?

A)April 30,2020
B)November 30,2019
C)August 1,2016

Question 47

Return on assets is calculated as net income divided by the ending balance for total assets.Return on assets is calculated as net income divided by average total assets.

Question 48

The mixture of liabilities and stockholders' equity a business uses is called its:

A)Bond contract.
B)Carrying value.
C)Capital structure.

Question 49

Which of the following is not a true statement?

A)Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing.
B)As a company's level of debt increases,the risk of bankruptcy increases.
C)Interest expense incurred when borrowing money,as well as dividends paid to stockholders,are both tax-deductible.

Question 50

Camp Elim obtains a $125,000,6%,five-year loan for a new camp bus on January 1,2018.If the monthly payment is $2,416.60,by how much will the carrying value decrease when the first payment is made on January 31,2018?

A)$1,791.60
B)$625.00
C)$2,416.60

Question 51

Which of the following is the primary source of corporate equity financing?

A)Bonds Payable.
B)Common Stock.
C)Leases.

Question 52

The times interest earned ratio compares interest expense with income available to pay interest charges.

Question 53

For a five-year installment note signed on January 1,2016,at which of the following dates would the carrying value be the highest?

A)August 1,2016
B)November 30,2019
C)April 30,2020

Question 54

Which of the following leases is essentially the purchase of an asset with debt financing?

A)An operating lease.
B)A capital lease.
C)Both an operating and a capital lease.

Question 55

In each succeeding payment on an installment note:

A)The amount that goes to decreasing the carrying value of the note increases.
B)The amount that goes to decreasing the carrying value of the note decreases.
C)The amount that goes to decreasing the carrying value of the note is unchanged.

Question 56

In each succeeding payment on an installment note:

A)The amount of interest expense increases.
B)The amount of interest expense decreases.
C)The amount of interest expense is unchanged.

Question 57

Which of the following is not a reason why some companies lease rather than buy?

A)Leasing may allow you to borrow with little or no down payment.
B)Leasing can improve the balance sheet by reducing long-term debt.
C)Leasing can lower income taxes.
D)Leasing transfers the title to the lessee at the beginning of the lease.

Question 58

Under an operating lease,leasing improves the balance sheet by reducing:

A)There is no effect on the balance sheet.
B)Short-term debt.
C)Assets.
D)Long-term debt.

Question 59

Profits generated by the company are a(n):

A)source of external financing.
B)source of internal financing.
C)liability.

Question 60

Camp Elim obtains a $125,000,6%,five-year loan for a new camp bus on January 1,2018.What amount will be recorded for interest expense for the first payment on January 31,2018?

A)$625
B)$125
C)$7,500

Question 61

A $500,000 bond issue sold for $510,000.Therefore,the bonds:

A)Sold at a premium because the stated interest rate was higher than the market rate.
B)Sold for the $500,000 face amount plus $10,000 of accrued interest.
C)Sold at a discount because the stated interest rate was higher than the market rate.

Question 62

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 6%.These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.

Question 63

A $500,000 bond issue sold for $490,000.Therefore,the bonds:

A)Sold at a discount because the stated interest rate was higher than the market rate.
B)Sold for the $500,000 face amount less $10,000 of accrued interest.
C)Sold at a premium because the stated interest rate was higher than the market rate.
D)Sold at a discount because the market interest rate was higher than the stated rate.

Question 64

Which of the following definitions describes a serial bond?

A)Matures on a single date.
B)Secured only by the "full faith and credit" of the issuing corporation.
C)Matures in installments.

Question 65

A bond issue with a face amount of $500,000 bears interest at the rate of 10%.The current market rate of interest is also 10%.These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.

Question 66

Convertible bonds:

A)Provide potential benefits only to the issuer.
B)Provide potential benefits only to the investor.
C)Provide potential benefits to both the issuer and the investor.

Question 67

For a bond issue that sells for more than the bond face amount,the stated interest rate is:

A)The actual yield rate.
B)The prime rate.
C)More than the market rate.

Question 68

Which of the following definitions describes a term bond?

A)Matures on a single date.
B)Secured only by the "full faith and credit" of the issuing corporation.
C)Matures in installments.

Question 69

The price of a bond is equal to:

A)The future value of the face amount only.
B)The present value of the interest only.
C)The present value of the face amount plus the present value of the stated interest payments.

Question 70

Term bonds are:

A)Bonds issued below the face amount.
B)Bonds that mature in installments.
C)Bonds that mature all at once.

Question 71

Which of the following definitions describes a secured bond?

A)Matures on a single date.
B)Secured only by the "full faith and credit" of the issuing corporation.
C)Matures in installments.
D)Supported by specific assets pledged as collateral by the issuer.

Question 72

The advantages of obtaining long-term funds by issuing bonds,rather than issuing additional common stock,include which of the following?

A)Interest payments are tax deductible to the company,while dividends are not.
B)The risk of going bankrupt decreases.
C)Expansion is achieved without surrendering ownership control.
D)Interest payments are tax deductible to the company,while dividends are not.Also,expansion is achieved without surrendering ownership control.

Question 73

Bonds can be secured or unsecured.Likewise,bonds can be term or serial bonds.Which is more common?

A)Secured and term.
B)Secured and serial.
C)Unsecured and term.

Question 74

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 8%.These bonds will sell at a price that is:

A)Equal to $500,000.
B)More than $500,000.
C)Less than $500,000.

Question 75

The advantages of obtaining long-term funds by issuing bonds,rather than issuing additional common stock,include which of the following?

A)Funds are obtained without surrendering ownership control.
B)Interest expense is tax-deductible.
C)The company's default risk decreases.
D)Funds are obtained without surrendering ownership control,as well as,interest expense is tax-deductible.

Question 76

Ordinarily,the proceeds from the sale of a bond issue will be equal to:

A)The face amount of the bond.
B)The total of the face amount plus all interest payments.
C)The present value of the face amount plus the present value of the stream of interest payments.

Question 77

Serial bonds are:

A)Bonds backed by collateral.
B)Bonds that mature in installments.
C)Bonds with greater risk.

Question 78

For a bond issue that sells for less than the bond face amount,the stated interest rate is:

A)The actual yield rate.
B)The prime rate.
C)More than the market rate.
D)Less than the market rate.

Question 79

A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?

A)Secured and term.
B)Secured and serial.
C)Unsecured and term.

Question 80

Which of the following is not true regarding callable bonds?

A)This feature allows the borrower to repay the bonds before their scheduled maturity date.
B)This feature helps protect the borrower against future decreases in interest rates.
C)Callable bonds benefit the bond investor.