Deck 13: Long Term Liabilities

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Financial leverage is also known as trading on the equity.

Answer 3

True

Question 4

The interest coverage ratio is expressed as a percentage.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

Bondholders share voting rights with stockholders.

Question 10

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

Question 11

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 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

The call price of bonds is usually below face value.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

Face interest rate is another term for market interest rate.

Question 27

Bondholders are creditors of the issuing corporation.

Question 28

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

Question 29

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

Question 30

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

Question 31

Secured bonds are also known as debentures.

Question 32

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

Question 33

A capital lease represents both an asset and a liability.

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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 39

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

Question 40

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

Question 41

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Question 42

Term bonds are of shorter duration than serial bonds.

Question 43

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

Question 44

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

Question 45

Bond certificates are issued to creditors of the issuing corporation.

Question 46

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

Question 47

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 48

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

Question 49

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

Question 50

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 51

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

Question 52

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

Question 53

Unamortized Bond Discount is a contra-liability account.

Question 54

A bond agreement is referred to as the debenture.

Question 55

When bonds are sold between the interest payment dates, the issuing corporation
collects from investors the interest that has accrued since the last interest
payment date.

Question 56

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 57

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 58

A bond sells at the face value when the face interest rate of the bond is identical to the market interest rate for similar bonds on the date of the issue.

Question 59

Interest on bonds usually is paid annually.

Question 60

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

Question 61

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 62

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 63

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 64

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

Question 65

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 66

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

Question 67

When the effective interest method of amortization is used for a bond premium, the amount of premium to be amortized for a period is calculated by subtracting the amount of bond interest expense for the period from the amount of cash to be paid for interest for the same period.

Question 68

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

Question 69

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

Question 70

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 71

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

Question 72

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 73

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

Question 74

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 75

The market interest rate is the rate that an issuer of bonds actually will have to bear and that an investor (purchaser) actually will earn over the bond's life.

Question 76

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

Question 77

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

Question 78

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 79

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 80

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.