Deck 2: Non-Current Financial Liabilities

Question 1

Which statement best explains the concept of "leverage"?

A)A measure of the efficiency of the company.
B)A measure of solvency of the company.
C)A measure of the company's operations.
D)A measure of the company's debt paying ability.

Answer 1

B

Question 2

What are "secured bonds"?

A)Bonds that never mature.
B)Bonds that protect investors against inflation.
C)Bonds that mature at different dates.
D)Bonds backed by specific collateral.

Answer 2

D

Question 3

What are "zero-coupon bonds"?

A)Bonds that pay the market rate of interest.
B)Bonds that are unsecured.
C)Bonds that do not pay interest.
D)Bonds that are sold at a premium.

Answer 3

C

Question 4

Which statement is not correct about financial leverage for a $300,000 investment versus a $100,000 investment?

A)The probability of success is the same under both investment options.
B)The payout will be 3 times higher or 3 times lower with the larger investment.
C)The probability of success is 3 times greater with the larger investment.
D)The larger investment increases the return on equity but also faces a greater potential for loss.

Question 5

Which statement is correct about financial leverage?

A)It reduces the risk of bankruptcy to the company.
B)It reduces the level of risk exposure of the shareholders.
C)It quantifies the relationship between the relative level of a firm's debt and its equity base.
D)It has nothing to do with the relationship between the relative level of a firm's debt and its equity base.

Question 6

Which of the following would be a "non-current liability"?

A)Payment due after 3 years, but the company has violated the debt covenants.
B)Payment due to a supplier 45 days after year-end for supplies received before year-end.
C)Payment due to a supplier in 18 months for goods to be received 3 months after year-end.
D)Payment due after 3 years, on which the debt covenants have been not been violated.

Question 7

What is a bond indenture?

A)Guarantee of the price to the borrower.
B)Contract that outlines the terms of the borrowing agreement.
C)Promise from the borrower to restrict certain activities.
D)Feature that permits the borrower to redeem before maturity.

Question 8

What are "stripped bonds"?

A)Bonds that pay the market rate of interest.
B)Bonds that are unsecured.
C)Bonds that pay no interest and are sold at a discount.
D)Bonds that are sold at a premium.

Question 9

What are "non-current liabilities"?

A)Obligations that are expected to be settled in the next operating cycle of the company.
B)Obligations that are expected to be settled within the next 12 months.
C)Obligations that are expected to be settled more than 12 months after the company's year-end.
D)Obligations that are expected to be settled more than 24 months after the company's year-end.

Question 10

Which statement is correct about the financial leverage of a company with an equity base of $400,000?

A)A company that borrows $150,000 is more leveraged than a company that borrows $250,000.
B)A company that borrows $250,000 is more leveraged than a company that borrows $150,000.
C)The return on equity of the company is unaffected by the financial leverage.
D)The return on equity of the company will be higher if it has a lower leverage.

Question 11

Explain the meaning of financial leverage and leveraged buyout.

Question 12

What are some considerations in determining a safe level of debt?

Question 13

What are "serial bonds"?

A)Bonds that are seldom used in Canada.
B)Bonds that mature at regular scheduled dates.
C)Bonds that are sold at a discount.
D)Bonds that are sold at a premium.

Question 14

What are "debentures"?

A)Bonds that are unsecured.
B)Bonds that protect investors against inflation.
C)Bonds that mature at different dates.
D)Bonds backed by specific collateral.

Question 15

What is "firm commitment" underwriting?

A)Broker's guarantee of the price to the borrower.
B)Broker sells as much of the debt issue as possible.
C)Debt that is backed by specific collateral.
D)Feature that permits the borrower to redeem before maturity.

Question 16

What is the "best efforts" approach?

A)Broker's guarantee of the price to the borrower.
B)Broker sells as much of the debt issue as possible.
C)Debt that is backed by specific collateral.
D)Feature that permits the issuer to redeem before maturity.

Question 17

Which statement best explains a "leveraged buyout"?

A)A purchase where a small portion of the purchase price is raised by borrowing against the acquired assets.
B)A purchase where a significant portion of the purchase price is raised by borrowing against the acquired assets.
C)A purchase that is deemed too risky from a solvency perspective for the shareholders.
D)A purchase that is deemed too risky from a solvency perspective for the bondholders.

Question 18

What is a "covenant"?

A)Guarantee of the price to the borrower.
B)Contract that outlines the terms of the borrowing agreement.
C)Promise from the borrower to restrict certain activities.
D)Feature that permits the issuer to redeem before maturity.

Question 19

Why do bonds often include covenants?

A)To reduce information asymmetry.
B)To reduce moral hazard.
C)To compensate for value-added services.
D)To ensure repayment of the bond.

Question 20

Which statement is correct about financial leverage?

A)Leverage can increase an investor's returns but also increases the risk of loss.
B)Leverage can decrease an investor's returns and also decrease the risk of loss.
C)Leverage decreases the payments that a company makes on an ongoing basis.
D)Leverage decreases the debt level relative to a company's equity base.

Question 21

What are the reasons for issuing bonds rather than using a bank loan?

Question 22

Why do lenders avoid lending large amounts of money to one borrower?

Question 23

Contrast the two methods used by investment banks when selling bonds on behalf of a company, their client.

Question 24

What are positive and negative covenants? Give an example of a positive and negative covenant.

Question 25

What is the market rate?

A)Price of bond on issue date.
B)Amount to be repaid at maturity.
C)Rate of return earned by the investor.
D)Interest rate specified in the bond indenture.

Question 26

What are "callable bonds"?

A)Bonds that have cash flows indexed to inflation.
B)Bonds that can be redeemed 1 year before maturity.
C)Bonds that can be redeemed before maturity.
D)Bonds that are sold at a premium.

Question 27

Explain the difference between real-return bonds, convertible bonds and perpetual bonds.

Question 28

What does an "AAA" credit rating mean?

Question 29

How should non-current financial liabilities be recorded initially?

A)At face value.
B)At fair value.
C)At fair value less transaction costs.
D)At face value less transaction costs.

Question 30

Based on the characteristics provided below, what kind of bond is being discussed?
1. ________ are a set of bonds issued at the same time but that mature at regular scheduled dates rather than all on the same date.
2. ________ are bonds that never mature.
3. ________ allow the holder to exchange the bond into other securities in the corporation, usually common shares.
4. ________ protect investors against inflation.

Question 31

When will bonds sell at a discount?

A)When the coupon rate is below the par value.
B)When the coupon rate is below the market rate.
C)When the coupon rate is above the market rate.
D)When the coupon rate is above the par value.

Question 32

What is meant by the "spread" charged by banks on loans?

Question 33

What is the role of debt rating agencies and what two benefits result from their rating a company?

Question 34

What is the coupon rate?

A)Yield on the issue date.
B)Amount to be repaid at maturity.
C)Rate of return earned by the investor.
D)Interest rate specified in the bond indenture.

Question 35

Why are banks able to pay such low interest rates on customer deposits?

Question 36

Why do companies sell notes directly to the investing public?

Question 37

Non-current debt instruments exchanged for assets are recognized at:

A)book value.
B)fair value.
C)cash paid.
D)cash equivalents paid.

Question 38

Based on the characteristics provided below, what kind of bond is being discussed?
1. ________ permit the issuing company to redeem before maturity.
2. ________ are bonds backed by specific collateral such as a mortgage on real estate.
3. ________ are unsecured bonds.
4. ________ are bonds that do not pay interest and are sold at a discount and mature at face value.

Question 39

A $100,000 5-year 6% bond is issued on January 1, 2021. The bond pays interest annually. The market rate is 7%. What is the selling price of the bonds, rounded to nearest dollar?

A)$4,100
B)$95,900
C)$100,000
D)$104,213

Question 40

A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 6%. What is the selling premium or discount on the bonds, rounded to nearest dollar?

A)$4,213 discount
B)$4,213 premium
C)$4,100 discount
D)$4,100 premium

Question 41

A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 8%. What is the selling price of the bonds, rounded to nearest dollar?

A)$96,007
B)$103,993
C)$104,100
D)$95,890

Question 42

When will bonds sell without a premium or discount?

A)When the coupon rate equals the par value.
B)When the coupon rate is below the market rate.
C)When the coupon rate is above the market rate.
D)When the coupon rate is equal to the market rate.

Question 43

On November 1, 2020, FastCare sold $5,000,000 of three-year bonds for $4,750,325. From the proceeds, the company paid accounting fees of 50,000. Interest of 5% is payable annually. What is the effective rate of interest (round to 2 decimal places)?

A)7.30%
B)5.00%
C)4.69%
D)3.63%

Question 44

A $100,000 5-year 5% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 7%. What is the selling premium or discount on the bonds, rounded to nearest dollar?

A)$8,659 premium
B)$8,200 premium
C)$8,659 discount
D)$8,200 discount

Question 45

What is the effective interest rate?

A)Yield on the issue date.
B)Amount to be repaid at maturity.
C)Price of bond on issue date.
D)Interest rate specified in the bond indenture.

Question 46

On April 15, 2020, Cando Inc. sold $10,000,000 of five-year, 3% bonds for $9,972,469. From the proceeds, Cando paid its investment bank a $200,000 sales commission.
Interest is payable semi-annually on April 15 and October 15. What is the effective rate of interest (round to 2 decimal places)?

A)1.53%
B)1.75 %
C)3.00%
D)3.50%

Question 47

Cindy Corp sold $400,000 of three-year bonds for $300,500. Interest is of 7.5% is payable annually. What is the effective rate of interest (round to 2 decimal places)?

A)19.15%
B)14.57%
C)13.88%
D)7.50%

Question 48

When will bonds sell at a premium?

A)When the coupon rate is equal to the par value.
B)When the coupon rate is below the market rate.
C)When the coupon rate is above the market rate.
D)When the coupon rate is equal to market value.

Question 49

On April 1, 2020, a company sold $3,500,000 of ten year, 6% bonds for $2,222,400. From the proceeds, the company paid $200,000 sales commission. Interest is payable semi-annually on April 1 and October 1. What is the effective rate of interest (round to 2 decimal places)?

A)6.25%
B)6.98%
C)9.81%
D)11.46%

Question 50

Ginny Inc. sold $800,000 of two-year bonds for $701,500 less commissions of $50,500. Interest is of 5.5% is payable semi-annually. What is the effective rate of interest (round to 2 decimal places)?

A)5.50%
B)8.43%
C)8.65%
D)17.29%

Question 51

On May 5, 2020, Bennix sold $1,000,000 of five-year, 3% bonds for $900,500. From the proceeds, the company paid fees of 100,000. Interest is payable semi-annually on May 5 and November 5. What is the effective rate of interest (round to 2 decimal places)?

A)3.00%
B)3.72 %
C)3.95%
D)6.27%

Question 52

A $100,000 5-year 6% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 8%. What is the selling price of the bonds, rounded to nearest dollar?

A)$7,986
B)$92,014
C)$100,000
D)$108,425

Question 53

A $100,000 5-year 6% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 7%. What is the discount or premium of the sale of the bonds, rounded to nearest dollar?

A)$4,100 discount
B)$4,100 premium
C)$95,900 discount
D)$100,000 premium

Question 54

A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 6%. What is the selling price of the bonds, rounded to nearest dollar?

A)$4,213
B)$95,500
C)$100,000
D)$104,213

Question 55

A $100,000 5-year 6% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 8%. What is the selling price of the bonds, rounded to nearest dollar?

A)$91,575
B)$92,014
C)$107,985
D)$108,425

Question 56

On June 1, 2020, ABC LTD. provides a vendor with an $18,500 non-interest-bearing note due on June 1, 2021, in exchange for furniture with a list price of $18,100. At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 12% per annum for loans that mature in one year or less and 15% for loans with longer maturities.

A)$16,087
B)$16,518
C)$18,100
D)$18,500

Question 57

Canaroo Inc. sold $800,000 of two-year bonds for $701,500 less commissions of $50,500. Interest is of 5.5% is payable annually. What is the effective rate of interest (round to 2 decimal places)?

A)5.50 %
B)8.43%
C)8.65%
D)17.29%

Question 58

A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 6%. What is the selling premium or discount on the bonds, rounded to nearest dollar?

A)$4,213 discount
B)$4,213 premium
C)$100,000 discount
D)$104,213 premium

Question 59

A $100,000 5-year 7% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 5%. What is the selling premium or discount on the bonds, rounded to nearest dollar?

A)$8,659 premium
B)$8,200 premium
C)$8,659 discount
D)$8,200 discount

Question 60

Which statement is correct about offsetting?

A)It deteriorates key financial ratios.
B)It shows the net amount of related assets and liabilities.
C)It shows the related assets and liabilities as contra accounts.
D)It makes it easier for borrowers to fulfill covenants.

Question 61

Over the River Co. (OTRC)sells $1,200,000 of 6-year, 10% bonds at par plus accrued interest. The bonds are dated January 1, 2020 but due to market conditions are not issued until May 1, 2020. Interest is payable on June 30 and December 31 each year. The market rate of interest at time of issue is the same as the stated rate.
Required:
Prepare journal entries to record:
a. The issuance of the bonds on May 1, 2020. Assume that OTRC has adopted a policy of crediting accrued interest payable for the accrued interest on the date of sale.
b. Payment of interest on June 30, 2020.
c. Payment of interest on December 31, 2020.

Question 62

Stay Fit for Life Inc. issues three series of $10,000,000 ten-year bonds dated January 1,2020 on the issue date. Interest is payable on June 30 and December 31 each year. Series A has a coupon rate of 7%; series B is 8%; and series C is 11 %. The market rate of interest at time of issue is 8%.
Required:
a. Prior to making any numerical calculations, comment on whether:
i. Series A will sell at a discount, par, or premium and briefly explain why.
ii. Series B will sell at a discount, par, or premium and briefly explain why.
iii. Series C will sell at a discount, par, or premium and briefly explain why.
b. Prepare journal entries to record the issuance of:
i. The series A bonds.
ii. The series B bonds.
iii. The series C bonds.

Question 63

Which statement is correct about the derecognition of an obligation before maturity?

A)There will be a gain on retirement.
B)There will be a loss on retirement.
C)There will be no gain or loss on retirement.
D)There could be either a gain or loss on retirement.

Question 64

On June 1, 2020, Bean LTD. provides a vendor with a $125,500 non-interest-bearing note due on June 1, 2023, in exchange for equipment with a list price of $118,100. At what amount will the equipment be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 9% for loans with longer maturities.

A)$118,100
B)$105,372
C)$96,909
D)$91,195

Question 65

On May 1, 2020, SBC INC. buys a photocopier listed for $2,900. The office supply store agrees to accept a $800 down payment and a $2,100, three-year note payable at $798 per year including interest at 7%. The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities. At what amount will the photocopier be recorded at in the accounting records?

A)$1,950
B)$2,100
C)$2,900
D)$2,653

Question 66

Which statement is correct about offsetting?

A)Offsetting generally provides decision-useful information for financial statement users.
B)Offsetting aids in financial statement user's ability to correctly interpret financial results.
C)Offsetting is generally prohibited under IFRS, unless it is specifically required.
D)Offsetting is required under IFRS when there is a legally enforceable right of offset.

Question 67

Explain 3 instances when the fair value of the non-current liability will not equal the cash proceeds.

Question 68

Cynthia Dixie Accounting Inc. takes advantage of a well-known office furnishings store's low-interest-rate financing. Cynthia buys furniture on the first day of its fiscal year, signing a $19,000, five-year note. The note is payable in full at maturity. Interest is payable annually at 2%. The market rate of interest for similar transactions is 5%.
Required:
Prepare journal entries to record:
a. The purchase of the office furniture.
b. The payment of interest and related amortization of the discount at the end of year 1.

Question 69

Bold Accountants Co. sells $6,000,000 of 10-year, 6% bonds priced to yield 5.5%. The bonds are dated and issued on January 1, 2020. Interest is payable on January 1 and July 1 each year. Bold's year-end is June 30.
Required:
Prepare entries for
a. The issuance of the bonds.
b. Accrual of interest and related amortization on June 30, 2020.
c. Payment of interest on July 1,2020.
d. Payment of interest and related amortization on January 1,2021.

Question 70

On May 1, 2020, SBC INC. buys a computer listed for $12,600. The office supply store agrees to accept a $1,600 down payment and a $11,000, three-year note payable at $3,500 per year. The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities. At what amount will the note be recorded at in the accounting records?

A)$1,800
B)$8,126
C)$8,553
D)$11,000

Question 71

Blue Sky Travel Inc. issues $2,000,000 of ten-year, 8% bonds dated January 1, 2020. Interest is payable on January 1 and July 1 each year. The proceeds realized from the issue were the $1,821,367 sales price less the $20,000 fee charged by Blue Sky's investment bank. Blue Sky's year-end is December 31.
Required:
Prepare journal entries:
a. The issuance of the bonds.
b. Payment of interest and related amortization on July 1, 2020.
c. Accrual of interest and related amortization on December 31, 2020.

Question 72

Canadian Sea Rides Ltd. issues $8,000,000 of four-year, 4% bonds dated January 1, 2020. Interest is payable on January 1 and July 1 each year. The proceeds realized from the issue were the $8,529,082 sales price less the $50,000 fee charged by Sea's lawyers. Sea's year-end is December 31.
Required:
Prepare entries for
a. The issuance of the bonds.
b. Payment of interest and related amortization on July 1, 2021.
c. Accrual of interest and related amortization on December 31, 2021.

Question 73

On May 1, 2020, Sea Escape Ltd. purchases a new automobile for $18,000 from the dealer who provides the financing. The three-year, interest-free loan is repayable at $500 per month. The market rate of interest for similar transactions is 0.25% per month.
Required:
Prepare journal entries to record:
a. the purchase of the automobile.
b. the accrual of interest and the loan payment at the end of May 2020.

Question 74

On May 1, 2020, SBC INC. buys a photocopier listed for $2,900. The office supply store agrees to accept a $800 down payment and a $2,100, three-year note payable at $798 per year. The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities. At what amount will the note be recorded at in the accounting records?

A)$1,853
B)$1,950
C)$2,100
D)$2,900

Question 75

Compare and contrast the two methods for amortizing the discount/premium.
Interest expense in the first period is higher under which method for bonds sold at a discount? For bonds sold at a premium?
Why does IFRS require public companies to use the effective interest method?
Why do the Accounting Standards for Private Enterprises allow companies to use the straight-line method?

Question 76

Explain how non-current liabilities are measured after initial recognition.

Question 77

On May 1, 2020, VeryFine LTD. provides a vendor with a $18,000 non-interest-bearing note due on May 1, 2021 in exchange for furniture with a list price of $17,400. At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 8% for loans with longer maturities.

A)$16,415
B)$16,667
C)$16,981
D)$18,000

Question 78

Which statement is correct about the derecognition of a matured obligation?

A)There will be a gain on retirement.
B)There will be a loss on retirement.
C)There will be no gain or loss on retirement.
D)There could be either a gain or loss on retirement.

Question 79

Really Amazing Vacations Ltd. issues $1,000,000 of ten-year, 10% bonds dated January 1,2020. Interest is payable on January 1 and July 1 each year. The proceeds realized from the issue were the $1,048,801 sales price less the $80,000 fee charged by Really Amazing's investment bank. Really Amazing's year-end is December 31.
Required:
Prepare journal entries:
a. The issuance of the bonds.
b. Payment of interest and related amortization on July 1, 2020.
c. Accrual of interest and related amortization on December 31, 2020.

Question 80

When should an entity offset a financial asset and a financial liability?