Deck 9: Long-Term Liabilities

Question 1

When the yield rate of interest is greater than the stated rate,then the bond will be issued at a discount.

Answer 1

True

Question 2

The contract rate is also called the coupon or stated rate.

Answer 2

True

Question 3

The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period.

Answer 3

True

Question 4

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

Question 5

Convertible bonds normally allow bondholders to convert the bond into another security.

Question 6

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

Question 7

If a bondholder has the right to retire the bonds,they are referred to as callable.

Question 8

When a bond is issued at a discount,the amortization of the bond interest increases each year using the straight line method.

Question 9

Mortgage bonds are secure bonds.

Question 10

A lease is accounted for as an operating lease if the present value of the lease payments is at least 90 percent of the fair value of the leased property.

Question 11

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

Question 12

The market value of a bond is determined by calculating its present value,which is based on the face amount,the number of periods,and the market rate of interest.

Question 13

A significant disadvantage of financing with debt rather than shares is the fact that the interest expense on debt is not tax-deductible.

Question 14

In an operating lease,the lessor retains the risks and obligations of ownership.

Question 15

The amortization of a bond premium increases the effective interest expense incurred each period for the issuer.

Question 16

The debt-to-equity ratio is defined as total liabilities divided by total shareholders' equity.

Question 17

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

Question 18

The relative cost of issuing debt (interest payments)is often lower than the cost of issuing equity.

Question 19

Long-term debt generally refers to obligations that extend beyond one year.

Question 20

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 21

A bond's ____________________ is computed by taking the bond's face value,then either subtracting any unamortized discount or adding any unamortized premium.

Question 22

The amount of money the borrower agrees to repay at maturity is usually referred to as the ____________________.

Question 23

The bond's ____________________ price is typically quoted as a percentage of the face value of the bond.

Question 24

____________________ is the amortization method of transferring the same amount from the bond discount or premium each time period to adjust interest expense.

Question 25

In periods of inflation,debt financing is preferable to equity financing because the company is able to repay the lender in dollars that have declined in purchasing power.

Question 26

Although operating leases are NOT recorded on the balance sheet by the lessee,they are disclosed in the ____________________.

Question 27

If the yield rate of interest is greater then the stated rate,then the bonds are issued at a(n)____________________.

Question 28

When evaluating a company's solvency,an investor's major concern is whether all debt has been properly recorded.

Question 29

A potential advantage of debt financing over equity financing is that it fixes the amount of compensation to the lender.

Question 30

____________________ bonds may be retired by the issuing company before their specified due date.

Question 31

Bonds are issued at a(n)____________________ when the issue price exceeds the face value.

Question 32

A(n)____________________ lease is recorded on the lessee's balance sheet as an asset and related liability.

Question 33

Under the effective interest method of amortization,the interest expense for each period is the carrying value times the ____________________.

Question 34

Obligations that extend beyond one year are referred to as ____________________.

Question 35

For a finance lease,the lessee must record both an asset and a liability.The amount of the asset is subsequently reduced by the process of ____________________.

Question 36

When each payment reduces the outstanding loan balance,which,in turn,reduces the interest expense in the subsequent period,it is called a(n)____________________ debt.

Question 37

The effective interest method amortizes premium or discount in a manner that produces a(n)____________________ rate of interest from period to period.

Question 38

An advantage of financing with debt rather than shares is that interest expense is ____________________ for tax purposes.

Question 39

Discount on bonds payable is shown on the balance sheet as a(n)____________________.

Question 40

The ____________________ rate of interest is a function of economic factors and the creditworthiness of the borrower.

Question 41

Match these terms with their definitions.

-give the lender the option to convert the debt into other securities-typically shares of common shares.

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 42

Match these terms with their definitions.

-give the borrower the option to pay off the debt prior to maturity

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 43

Match these terms with their definitions.

-a contract that gives one party the right to use an asset that belongs to another party

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 44

Match these terms with their definitions.

-this debt,evidenced by a formal agreement or contract to repay,is frequently issued in exchange for a noncash asset such as equipment

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 45

Match these terms with their definitions.

-the rate found in the debt contract that determines the amount of the interest payment

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 46

Match these terms with their definitions.

-debt that is so risky that it must pay a high rate of interest to compensate the lender for the added risk

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 47

Match these terms with their definitions.

-debt that does not have collateral and is thus unsecured

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 48

Match these terms with their definitions.

-general term that refers to debt that provides collateral (e.g.,some asset)for the lender

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 49

Match these terms with their definitions.

-method where equal amounts of premium or discount are amortized to interest expense each period

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 50

Match these terms with their definitions.

-liabilities that do not mature within one year

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 51

Match these terms with their definitions.

-debt that is secured by real estate

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 52

Match these terms with their definitions.

-the party who has the use of a leased asset

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 53

Match these terms with their definitions.

-occurs when a bond's issue price exceeds its face value

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 54

Match these terms with their definitions.

-the amount that must be repaid at maturity

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 55

The two promises made by a bond issuer to the purchaser of the bond are to pay periodic interest and to ___________________.

Question 56

The times interest earned ratio divides __________________________ by interest expense.

Question 57

Match these terms with their definitions.

-method where interest expense for the period is always the yield (i.e.,effective interest rate)times the carrying value of the bonds at the beginning of the period.

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 58

Match these terms with their definitions.

-agreement whereby the legal owner of the asset retains substantially all of the risks and obligations of ownership

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 59

Match these terms with their definitions.

-a non-cancelable agreement that is in substance a purchase of the leased asset

A)callable bonds
B)finance lease
C)convertible bonds
D)debenture bonds
E)junk bonds
F)mortgage bonds
G)notes payable
H)operating lease
I)secured bonds

Question 60

Match these terms with their definitions.

-the rate that reflects the provisions of the debt instrument,the credit standing of the borrowing business,and the current conditions in the credit markets and the economy as a whole

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 61

When do bonds sell at a premium?

A) when the issuing company has a better reputation than other companies in the same business
B) when the market rate of interest is less than the stated interest rate at the time of issue
C) when the yield rate of interest is more than the stated rate at the time of issue
D) when the issuing company agrees to repay the maturity before the due date

Question 62

Match these terms with their definitions.

-a type of liability which requires the issuing entity to pay the face value to the holder on the maturity date and to pay interest periodically at a specified rate

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 63

Match these terms with their definitions.

-term referring to the date that a bond's principal has to be repaid

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 64

Kiss Greetings planned to raise $500,000 by issuing bonds.The bond certificates were printed bearing a stated interest rate of 6%,which was equal to the yield rate of interest.However,before the bonds could be issued,economic conditions forced the yield rate up to 7%.If the life of the bonds is 10 years and interest is paid annually on December 31,how much will the company receive from the sale of the bonds?

A) exactly $500,000
B) less than $500,000
C) more than $500,000
D) The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%.

Question 65

Why are bonds a popular source of financing?

A) because the relative cost of issuing debt is often lower than the cost of issuing equity
B) because financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of shares
C) because a company having cash flow problems can postpone payment of interest to bondholders
D) because the bondholders can always convert their bonds into shares if they choose

Question 66

Which of the following does long-term debt generally include?

A) obligations that will be satisfied within one year
B) accounts payable
C) obligations that extend beyond one year
D) accrued expenses

Question 67

A company issued $10,000,000 of bonds.Assuming the most common denomination of bonds was issued,what was the number of bonds sold?

A) 10,000
B) 100,000
C) 1,000,000
D) 10,000,000

Question 68

Why are convertible bonds attractive to bondholders?

A) because they usually carry a higher rate of interest than non-convertible bonds
B) because they carry a convertible interest rate that can be increased when the market rate of interest increases
C) because they can be converted into shares at the bondholder's option
D) because the issuing company cannot retire the bonds before maturity

Question 69

Which statement is characteristic of bonds payable?

A) Generally, bonds are issued in denominations of $100.
B) Each payment to the bondholder includes interest and principle.
C) A debenture bond is backed by specific assets of the issuing company.
D) The interest rate in the bond contract is called the stated rate.

Question 70

Which of the following describes a callable bond?

A) The borrower has the right to pay off the bonds prior to the due date.
B) The borrower has the right to issue more bonds prior to the due date of existing bonds.
C) The investor has the right to delay the interest payments on the bonds.
D) The investor has the right to call off the interest payments on the bonds.

Question 71

When will bonds sell at a discount?

A) when the issuing company's credit standing is worse than that of other companies in a similar line of business
B) when the stated rate of interest is less than the yield rate of interest at the time of issue
C) when the stated rate of interest is more than the yield rate of interest at the time of issue
D) when the issuing company will be able to retire the bonds at less than face at maturity

Question 72

Match these terms with their definitions.

-occurs when a bond is issued for an amount that is less than the principal

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 73

Which situation exists when a company issues 10-year,9%,$1,000,000 bonds paying interest on an annual basis,at a premium?

A) The annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.
B) The annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.
C) The issue price will be less than $1,000,000.
D) The cash paid to bondholders will be based on the market rate of interest.

Question 74

Which of the following terms does NOT describe the interest rate printed on the bond certificate?

A) coupon rate
B) yield rate
C) contract rate
D) stated rate

Question 75

What is a characteristic of a callable bond?

A) The bondholder has the right to sell an option on the bond.
B) The issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%.
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 76

When bonds are issued by a company,which of the following does the accounting entry show?

A) an increase in liabilities and a decrease in shareholders' equity
B) an increase in both liabilities and shareholders' equity
C) an increase in both assets and liabilities
D) an increase in both assets and shareholders' equity

Question 77

Which of the following describes a convertible bond?

A) The issuer can convert from a fixed interest rate to a floating rate.
B) The bondholder can convert the bond from long-term to short-term.
C) The issuer can retire the bond before its specified maturity date.
D) The bondholder can convert the bond into common shares at a future time.

Question 78

Match these terms with their definitions.

-the process used to determine the amount of interest to be recorded in each of the periods the liability is outstanding

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 79

Match these terms with their definitions.

-the legal owner of a leased asset

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method

Question 80

Match these terms with their definitions.

-the use of borrowed capital to produce more income than needed to pay the interest on the debt

A)bond
B)contract, coupon, stated rate
C)discount
D)effective interest rate method
E)face value, par value, principal
F)interest amortization
G)lease
H)lessee
I)lessor
J)leverage
K)long-term debt
L)market rate, yield
M)maturity
N)premium
O)straight-line method