Deck 10: Long-Term Liabilities

Question 1

Failure to make interest payments on debt can force a company into bankruptcy.

Answer 1

True

Question 2

The practice of off-balance-sheet financing is illegal.

Answer 2

False

Question 3

In a monthly mortgage payment,the same amount is devoted to interest expense as in the previous month's payment.

Answer 3

False

Question 4

Under a capital lease,the lessor,not the lessee,should record depreciation.

Question 5

When interest payments on an investment exceed the earnings from the investment,negative financial leverage has occurred.

Question 6

The higher the debt to equity ratio,the greater the financial risk the company is taking.

Question 7

A corporation's stockholders are the primary recipients of financial leverage.

Question 8

The interest coverage ratio measures the degree of protection a company has from default on interest payments.

Question 9

Entering into a lease is an example of off-balance-sheet financing.

Question 10

The debt to equity ratio is a measure of financial leverage.

Question 11

The debt to equity ratio is expressed in terms of dollars.

Question 12

Financial leverage is also known as trading on the equity.

Question 13

Under an operating lease,the lessee records both an asset and a liability.

Question 14

Deferred income taxes arise when accounting methods used for financial reporting differ from those used on the income tax return.

Question 15

It is illegal for a company to use depreciation methods for financial reporting that differ from those used for income tax return purposes.

Question 16

When the terms of a lease require that the lessee record an asset and a liability,the two accounts are recorded at the present value of the total lease payments required.

Question 17

The interest coverage ratio is expressed as a percentage.

Question 18

Bondholders share voting rights with stockholders.

Question 19

Dividends on stock are tax-deductible to the issuing corporation,whereas interest on debt is not.

Question 20

Under an operating lease,each monthly payment is debited by the lessee to Rent Expense.

Question 21

Accounting for a defined benefit pension plan is simpler than accounting for a defined contribution plan.

Question 22

Under a defined contribution pension plan,retirement benefits are based entirely on the annual contribution to the fund plus earnings thereon.

Question 23

A capital lease represents both an asset and a liability.

Question 24

The callable feature of a bond can be exercised by the bondholder.

Question 25

Face interest rate is another term for market interest rate.

Question 26

Leases of short-term assets are operating leases,and leases of long-term assets are capital leases.

Question 27

Secured bonds are also known as debentures.

Question 28

Accounting for capital leases can be thought of as similar to accounting for mortgage payments.

Question 29

As the interest coverage ratio declines,the risk for creditors also declines.

Question 30

Financial leverage refers to the issuance of stock to raise cash.

Question 31

The more debt securities a corporation issues,the greater the risk of default.

Question 32

Costs of postretirement benefits other than pension plans should be expensed when paid to the retired employee.

Question 33

A capital lease is a lease of property,plant,or equipment that is in effect an installment purchase.

Question 34

If the face interest rate at the date of bond issuance exceeds the market interest rate,the bond will probably be sold at a discount.

Question 35

Bondholders are creditors of the issuing corporation.

Question 36

When a monthly mortgage payment is made and recorded,the debit to Mortgage Payable represents the reduction in the principal balance.

Question 37

The convertibility feature of a bond can be exercised by the issuing corporation.

Question 38

The call feature of bonds is useful if a company wants to retire a bond issue.

Question 39

The call price of bonds is usually below face value.

Question 40

Unamortized Bond Premium is added to Bonds Payable on the balance sheet.

Question 41

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the bond will probably be sold at a premium.

Question 42

Bond certificates are issued to creditors of the issuing corporation.

Question 43

When the present value of a bond issue is calculated,the discount rate used should equal the face interest rate of the bonds.

Question 44

The present value of a bond is determined by adding the discounted value of the payment at maturity to the discounted value of a series of fixed interest payments.

Question 45

When all the bonds of an issue mature at the same time,they are called serial bonds.

Question 46

The carrying amount always approaches the face value over the life of the bond.

Question 47

A bond agreement is referred to as the debenture.

Question 48

Unamortized Bond Discount is a contra-liability account.

Question 49

Most bonds issued today are coupon bonds rather than registered bonds.

Question 50

If a bond has a face interest rate of 6 percent,a face value of $20,000,and pays interest semi-annually,each interest payment will amount to $1,200.

Question 51

The market interest rate is also called the effective interest rate.

Question 52

The par value of a bond is equal to its face value.

Question 53

Term bonds are of shorter duration than serial bonds.

Question 54

If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970,the market interest rate at the date of issuance must have been greater than 7 percent.

Question 55

If the market interest rate at the date of issuance of a bond exceeds the face interest rate,the present value of the face value plus the present value of all the future interest payments will equal an amount less than the face value of the bond.

Question 56

A corporation probably does not know who owns its coupon bonds.

Question 57

Interest on bonds usually is paid annually.

Question 58

Once a corporation issues bonds,it must pay interest to the bondholders over the life of the bonds,usually semi-annually,and the principal of the bonds at maturity.

Question 59

An $80,000 bond issue priced at 97-3/4 is sold for $78,200.

Question 60

Bond issue costs have the effect of increasing a premium,or reducing a discount,on bonds issued.

Question 61

The calculation of cash for interest to be paid each interest period in connection with a bond payable is not influenced by any premium or discount upon issuance.

Question 62

Discounts or premiums are contra-accounts that are subtracted from or added to bonds payable on the balance sheet.

Question 63

Regardless of whether the straight-line method or the effective interest method is used,the carrying value of a term bond issued at a discount will decrease continually over the life of the bond.

Question 64

The amount of unamortized discount at the end of an interest period is equal to the amount of the unamortized discount at the beginning of the period minus the amount of discount that was amortized during the period.

Question 65

If a 20-year bond pays interest of 8 percent semi-annually,the present value of the bond is calculated based upon 4 percent and 40 periods.

Question 66

The carrying value of a bond is also referred to as its present value.

Question 67

When a bond issue is converted into common stock,total contributed capital is increased by the carrying value of the bonds converted.

Question 68

The effective interest method produces a constant dollar amount of bond interest expense to be reported each interest period.

Question 69

When bonds are converted to stock,no gain or loss is recognized.

Question 70

The present value of a bond is always less than the face value of the bond.

Question 71

When the present value of a bond issue is calculated,both the present value of a single sum table and the present value of an annuity table must be used.

Question 72

When there are material differences between the results of using the straight-line method and using the effective interest method of amortization,the effective interest method should be used.

Question 73

When a bond has been issued at a discount,the carrying value at the end of one period is equal to the carrying value at the beginning of the period plus the amount of discount that was amortized during the period.

Question 74

Whether a bond is sold at a discount or a premium,its carrying value will equal its face value on the maturity date.

Question 75

The carrying value of a bond issued at a premium is calculated at any given point in time by deducting the balance of the unamortized premium from the bond's face value.

Question 76

When the effective interest method of amortization is used,the amount of bond interest expense for a given period is calculated by multiplying the face interest rate by the bond's carrying value at the beginning of the given period.

Question 77

Under the effective interest method of amortizing a bond discount,the bond interest expense recorded for each period increases over the life of the bond.

Question 78

When bonds are called for retirement,any excess of the bonds' call price over the bonds' carrying value is reported as a gain on the income statement.

Question 79

Issuing bonds at a discount has the effect of decreasing interest expense below the face amount of interest.

Question 80

Total interest cost for a bond issued at a premium equals the total of the periodic interest payments minus the premium.