Deck 14: Long-Term Liabilities

Question 1

A company invests $10,000 at 7% compounded annually.At the end of the second year,the company should have $11,400 in the fund.

Answer 1

False
Explanation: $10,000 + ($10,000 * 7%) + [($10,000 + ($10,000 * 7%)) * 7%] = $11,449 or
$10,000 * 1.07 * 1.07 = $11,449

Question 2

Owners of coupon bonds are not required to pay tax on the interest earned.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

Question 5

Term bonds are scheduled for maturity on one specified date,whereas serial bonds mature at more than one date.

Question 6

Mortgage bonds are backed only by the good faith and credit of the issuing company.

Question 7

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

Question 8

Compound interest means that interest in a second period is based on the total amount borrowed plus the interest accrued in the first period.

Question 9

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

Question 10

Callable bonds reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.

Question 11

Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Question 12

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

Question 13

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage.

Question 14

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

Question 15

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

Question 16

The legal contract between the issuing corporation and the bondholders is called the bond indenture.

Question 17

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

Question 18

Debentures always have specific assets of the issuing company pledged as collateral.

Question 19

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

Question 20

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

Question 21

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 $8,710.60.

Question 22

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

Question 23

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Question 24

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 25

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

Question 26

The use of debt financing insures an increase in return on equity.

Question 27

A company has assets of $350,000 and total liabilities of $200,000.Its debt-to-equity ratio is 0.6.

Question 28

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

Question 29

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Question 30

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 31

Bond interest paid by a corporation is an expense,whereas dividends paid are not an expense of the corporation.

Question 32

The contract rate on previously issued bonds changes as the market rate of interest changes.

Question 33

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 34

A company's ability to issue unsecured debt depends on its credit standing.

Question 35

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Question 36

A bond is a written promise to pay an amount identified as the par value of the bond along with interest.

Question 37

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

Question 38

A company's debt-to-equity ratio was 1.0 at the end of Year 1.By the end of Year 2,it had increased to 1.7.Since the ratio increased from Year 1 to Year 2,the degree of risk in the firm's financing structure decreased during Year 2.

Question 39

The present value of an annuity factor at 8% for 10 years is 6.7101.This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.

Question 40

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Question 41

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Question 42

The carrying (book)value of a bond payable is the par value of the bonds plus the discount.

Question 43

When the contract rate is above the market rate,a bond sells at a discount.

Question 44

On January 1,a company issued a $500,000,10%,8-year bond payable,and received proceeds of $487,000.Interest is payable each June 30 and December 31.The total interest expense on the bond over its eight-year life is $400,000.

Question 45

When convertible bonds are converted to a company's stock,the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.

Question 46

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

Question 47

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 48

Premium on Bonds Payable is an adjunct or accretion liability account.

Question 49

When the contract rate on a bond issue is less than the market rate,the bonds will generally sell at a discount.

Question 50

A 10-year bond issue with a $100,000 par value,8% annual contract rate,with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

Question 51

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

Question 52

On January 1,a company issued a $500,000,10%,8-year bond payable,and received proceeds of $487,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The amount of interest expense to be recorded on June 30 is $25,000.

Question 53

On January 1,a company issued a $500,000,10%,8-year bond payable,and received proceeds of $487,000.Interest is payable each June 30 and December 31.The company uses the straight-line method to amortize the discount.The amount of discount amortized each period is $812.50.

Question 54

The issue price of bonds is found by computing the future value of the bond's cash payments,discounted at the market rate of interest.

Question 55

The market value or issue price of a bond is equal to the present value of all future cash payments provided by the bond.

Question 56

Long-term bonds have relatively higher interest rates because they carry higher risk due to the longer time period.

Question 57

Sinking fund bonds:

A)Require the issuer to set aside assets to 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 58

The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.

Question 59

The effective interest method yields increasing amounts of bond interest expense and decreasing amounts of premium amortization over the bond's life for bonds issued at a premium.

Question 60

The carrying (book)value of a bond at the time when it is issued is always equal to its par value.

Question 61

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 62

A disadvantage of bonds is:

A)Bonds require payment of periodic interest.
B)Bonds require payment of par value at maturity.
C)Bonds can decrease return on equity.
D)Bond payments can be burdensome when income and cash flow are low.
E)All of the choices are correct.

Question 63

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value of 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 64

An advantage of bond financing is:

A)Bonds do not affect owners' control.
B)Interest on bonds is tax deductible.
C)Bonds can increase return on equity.
D)It allows firms to trade on the equity.
E)All of the choices are correct.

Question 65

A company borrowed cash from the bank by signing a 5-year,8% installment note.The present value of an annuity at 8% for 5 years is 3.9927.Each annuity payment equals $75,137.13.The present value of the note is:

A)$ 75,137.13.
B)$ 94,013.13.
C)$300,000.00.
D)$375,137.13.
E)$197,810.00.

Question 66

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

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

Question 67

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 68

Secured bonds:

A)Are called 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 69

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 70

A company must repay the bank a single payment of $10,000 cash in 3 years for a loan it entered into.The loan is at 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 71

The carrying value of bonds at maturity is always equal to:

A)the amount of cash originally received in exchange for the bonds.
B)the par value that the issuer pays the holder.
C)the amount of discount or premium.
D)the amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.
E)$0.

Question 72

Bonds that mature at different dates with the result that the entire principal amount is repaid gradually over a number of periods are known as:

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

Question 73

A bond traded at 102½ 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 74

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 of 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 75

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

A)$ 10,489.88.
B)$ 11,004.88.
C)$ 50,000.00.
D)$ 52,450.00.
E)$238,325.00.

Question 76

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 77

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 78

All of the following statements regarding leases are true except:

A)For a capital lease the lessee records the leased item as its own asset.
B)For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the lessee does not.
C)Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D)Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.
E)For an operating lease the lessee reports the lease payments as rental expense.

Question 79

A pension plan:

A)Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
B)Can be underfunded if the accumulated benefit obligation is more than the plan assets.
C)Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients.
D)Can be a defined benefit plan in which future benefits are set, but the employer's contributions vary depending on assumptions about future pension assets and liabilities.
E)All of the choices are correct.

Question 80

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

A)Ownership rights in the issuing company.
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.