Deck 10: Accounting for Long-Term Debt

Question 1

[The following information applies to the questions displayed below.]

On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.


-Niagara records the first year's interest payment on December 31,Year 1.Centennial's prime rate is 4% for Year 1.Which of the following shows the effect of this event on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Answer 1

Option A

Question 2

[The following information applies to the questions displayed below.]

On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150.



-What is the amount of principal repayment included in the payment made on December 31,Year 1?

A)$25,920
B)$81,150
C)$74,658
D)$55,230

Answer 2

$55,230

Question 3

How are bonds payable usually classified on the balance sheet?

A)Current liabilities
B)Long-term liabilities
C)Investments and funds
D)Other assets

Answer 3

Long-term liabilities

Question 4

What is another term used to describe unsecured bonds?

A)Discount bonds
B)Coupon bonds
C)Debentures
D)Par value bonds

Question 5

[The following information applies to the questions displayed below.]

On January 1, Year 1, the Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.


-Which of the following shows the effect of the December 31,Year 1 payment?

A)Option A
B)Option B
C)Option C
D)Option D

Question 6

Chico Company borrowed $40,000 on a four-year,8% installment note.How will Chico record the issuance of this note?

A)
B)
C)
D)

Question 7

Which of the following describes a callable bond?

A)Can be called for early retirement at the option of the issuer
B)Can be called for early retirement at the option of the bondholder
C)Convertible to common stock at the option of the bondholder
D)convertible to common stock at the option of the issuer

Question 8

Which of the following correctly describes an installment note?

A)An installment note requires equal interest payments with the entire principal balance paid at maturity.
B)An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note.
C)An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note.
D)The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note.

Question 9

Currie Company borrowed $20,000 from Sierra Bank by issuing a 10% three-year note.Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042.Based on this information,what is the amount of the interest expense associated with the second payment? (Round your answer to the nearest dollar. )

A)$730
B)$1,396
C)$2,000
D)$8,042

Question 10

[The following information applies to the questions displayed below.]

On January 1, Year 1, Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $81,150.



-Which of the following shows the effects on the elements of the financial statement of the cash payment on December 31,Year 1?

A)Option A
B)Option B
C)Option C
D)Option D

Question 11

[The following information applies to the questions displayed below.]

On January 1, Year 1, the Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.


-Which of the following correctly shows the effect of the issuance of the note on Platte's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 12

Regardless of the specific type of long-term debt,which of the following is normally an expectation with regards to debt transactions?

A)Repayment of the debt
B)Payment of dividends
C)Payment of interest
D)Payment of interest and repayment of the debt

Question 13

On January 1,Year 1,Burton Corporation recorded the following journal entry:

Which of the following correctly describes the related transaction?

A)Burton issued bonds at 102.
B)Burton issued bonds at 98.
C)Burton issued bonds at a $4,000 premium.
D)Burton signed a note payable for $196,000.

Question 14

Which of the following describes the characteristics of a convertible bond?

A)Bonds mature at specified intervals throughout the life of the total issuance.
B)Bonds may be exchanged for stock at the discretion of the bondholder.
C)Bonds mature on a specified date in the future.
D)Bonds may be exchanged for stock at the discretion of the issuer.

Question 15

North Woods Company has a line of credit with Olympia State Bank.North Woods agreed to pay interest at an annual rate equal to 2% above the bank's prime rate.Funds are borrowed or repaid on the first day of each month and interest is paid in cash on the last day of each month.Borrowing is shown as a positive amount,and repayments are shown as negative amounts indicated by parentheses.Activity to date is given as follows:

What is the amount of interest paid at the end of March?

A)$150
B)$300
C)$267
D)$250

Question 16

Franklin Company obtained a $160,000 line of credit from State Bank on January 1,Year 1.The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate.The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of Year 1 are shown in the following table.Assume that Franklin borrows or repays on the first day of each month.

What is the amount of interest expense recognized in March?

A)$232
B)$262
C)$292
D)$408

Question 17

What is the name used for the type of secured bond that requires a pledge of a designated piece of property in case of default?

A)Debenture bond
B)Indenture bond
C)Mortgage bond
D)Registered bond

Question 18

How does the amortization of the principal balance on an installment note payable affect the amount of interest expense recorded each succeeding year?

A)Reduces the amount of interest expense each year
B)Increase the amount of interest expense each year
C)Has no effect on interest expense each year
D)Cannot be determined from the information provided

Question 19

[The following information applies to the questions displayed below.]

On January 1, Year 1, Niagara Corporation arranges a $6,000 line of credit with Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.


-Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1,Year 1.Which of the following shows the effect of this event on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 20

[The following information applies to the questions displayed below.]

On January 1, Year 1, the Platte Corporation issues a 5-year note payable for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.


-Which of the following correctly shows the effects of the December 31,Year 2 payment (rounded to the nearest whole dollar)?

A)Option A
B)Option B
C)Option C
D)Option D

Question 21

On January 1,Year 1,Bluestone Company issued bonds with a face value of $500,000 at 90.Which of the following journal entries would be required to record the bond issue?

A)
B)
C)
D)

Question 22

Johansen Company issued a bond at a discount.Which of the following shows how the issuance of the bonds affects the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 23

Kier Company issued $200,000 in bonds on January 1,Year 1.The bonds were issued at face value and carried a 4-year term to maturity.The bonds have a 6.5% stated rate of interest and interest is payable in cash on December 31 each year.Based on this information alone,what are the amounts of interest expense and cash flows from operating activities,respectively,that will be reported in the financial statements for the year ending December 31,Year 1?

A)$13,000 and Zero
B)Zero and $13,000
C)$13,000 and $13,000
D)Zero and Zero

Question 24

[The following information applies to the questions displayed below.]

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.


-Which of the following shows the effect of the interest payment and amortization on December 31,Year 1?

A)Option A
B)Option B
C)Option C
D)Option D

Question 25

Spokane Company called in bonds at a price that was above the carrying value of the bond liability.Which of the following shows how this event will affect the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 26

[The following information applies to the questions displayed below.]

On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.


-What is the amount of interest expense shown on Jones' income statement for the year ending December 31,Year 1?

A)$16,200
B)$21,000
C)$15,000
D)$13,800

Question 27

[The following information applies to the questions displayed below.]

On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.


-What is the total amount of liabilities shown on Jones' balance sheet at December 31,Year 2?

A)$191,600
B)$194,000
C)$196,400
D)$195,200

Question 28

Pace Company issued bonds with a face value of $200,000 at 97.How does the issuance affect the company's accounting equation?

A)Assets and liabilities would both increase by $200,000.
B)Assets and liabilities would both increase by $194,000.
C)Assets would increase by $194,000 and liabilities would increase by $200,000.
D)Assets would increase by $200,000,and liabilities would increase by $194,000.

Question 29

[The following information applies to the questions displayed below.]

On January 1, Year 1, Hanover Corporation issued bonds with a $70,500 face value, a stated rate of interest of 8%, and a 5-year term to maturity. The bonds were issued at 97. Hanover uses the straight-line method to amortize bond discounts and premiums. Interest is payable in cash on December 31 each year.



-How much interest expense will Hanover report on its income statement on December 31,Year 1?

A)$423
B)$2,115
C)$5,640
D)$6,063

Question 30

Which of the following is not a common restrictive covenant included in bond indentures to reduce risk to the investor?

A)Restrictions on increases in executive salaries
B)Restrictions on additional borrowing activities
C)Requirements that the names and addresses of the bondholders be registered with the bond issuer
D)Limitations on the payment of dividends

Question 31

On January 1,Year 1,Eureka Company issued $100,000 of five-year,7% bonds at face value.The annual cash payment for interest is due on January 1 of each year beginning January 1,Year 2.Based on this information,what is the total amount of liabilities related to these bonds that will be reported on the balance sheet at December 31,Year 1? (Hint: Consider the interest that might be owed to bondholders at December 31,Year 1. )

A)$100,000
B)$7,000
C)$99,300
D)$107,000

Question 32

Marvin Company issues $125,000 of bonds at face value on January 1.The bonds carry a 6% annual stated rate of interest.Interest is payable in cash on December 31 of each year.Which of the following shows the effect of the first interest payment on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 33

[The following information applies to the questions displayed below.]

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.


-On January 1,Year 2,Pierce Corporation called the bonds payable at a price of $25,450.Which of the following shows the effect of this transaction on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 34

The journal entry used to record the issuance of the bond and the receipt of cash would be:

A)
B)
C)
D)

Question 35

[The following information applies to the questions displayed below.]

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.


-Which of the following shows the effect of the bond issuance on January 1,Year 1?

A)Option A
B)Option B
C)Option C
D)Option D

Question 36

On January 1,Year 1,Williams Corporation issued $200,000 of callable bonds at face value.The bonds carried a 2% call premium.If Williams calls the bonds,how would this event affect the company's accounting equation?

A)Decrease stockholders' equity by $4,000.
B)Decrease liabilities by $200,000.
C)Decrease assets by $204,000.
D)All of these answer choices are correct.

Question 37

The journal entry used to record the interest payment on December 31,Year 2 would be:

A)
B)
C)
D)

Question 38

Which of the following is the term used to describe bonds that mature at specified intervals throughout the life of the issuance?

A)Term bonds
B)Registered bonds
C)Coupon bonds
D)Serial bonds

Question 39

[The following information applies to the questions displayed below.]

On January 1, Year 1, Jones Company issued bonds with a $200,000 face value, a stated rate of interest of 7.5%, and a 5-year term to maturity. The bonds were issued at 97. Interest is payable in cash on December 31st of each year. The company amortizes bond discounts and premiums using the straight-line method.


-What is the amount of cash outflow from operating activities shown on Jones' statement of cash flows for the year ending December 31,Year 2?

A)$15,000
B)$16,200
C)$13,800
D)$17,400

Question 40

Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?

A)The bonds are issued at a premium.
B)The bonds are issued at less than their face value.
C)It raises the effective interest rate above the stated rate of interest.
D)The bonds are issued at a premium and the effective interest rate is higher than the stated rate.

Question 41

A discount or premium on bonds payable can be defined by which of the following statements?

A)The difference between the market price on the issue date and the face value.
B)The difference between the call price and the face value of the bond.
C)The market rate of interest on the date of the bond issuance.
D)The difference between the interest rate and the market price of the bond.

Question 42

Clayton Corporation made the following entry in its general journal:

Which of the following describes the above transaction?

A)Clayton records interest expense and amortization of discount on bonds payable.
B)Clayton issues bonds with a face value of $5,400 for $5,000 cash.
C)Clayton records annual interest and amortization of premium on bonds.
D)Clayton redeems callable bonds when the carrying value is $5,400.

Question 43

[The following information applies to the questions displayed below.]

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.


-What is the amount of cash flow from operating activities on the statement of cash flows for the year ending December 31,Year 3?

A)$17,500
B)$15,000
C)$14,250
D)$12,500

Question 44

[The following information applies to the questions displayed below.]

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums.



-Which of the following statements is true if Wayne issued the bonds for 96?

A)The market rate of interest was equal to the stated rate of interest.
B)The market rate of interest was lower than the stated rate of interest.
C)The market rate of interest was higher than the stated interest rate.
D)The bonds carried a variable or floating rate that changed in response to market conditions.

Question 45

[The following information applies to the questions displayed below.]

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.


-What is the amount of interest expense appearing on the income statement for the year ending December 31,Year 3?

A)$17,500
B)$12,500
C)$14,250
D)$15,000

Question 46

Bruce Company experienced an accounting event that was recorded in the company's general journal as indicated below:

Which of the following shows how this event affects the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 47

King Company experienced an accounting event that affected its financial statements as indicated below:

Which of the following accounting events could have caused these effects on King's statements?

A)Repaid a bond issued at a discount.
B)Borrowed funds through a line-of-credit.
C)Made a payment on an installment loan.
D)Issued a bond at a discount.

Question 48

Which of the following statements is true regarding the straight-line method of amortizing discounts and premiums on bonds?

A)It assigns variable amounts of interest over the term of the liability.
B)It uses compound interest principles.
C)It assigns the same amount of interest to each interest period over the life of the bond.
D)It accurately reports the amount of interest expense incurred during each interest period.

Question 49

[The following information applies to the questions displayed below.]

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums.



-Assuming Wayne issued the bonds for 102.5,what is the carrying value of the bonds on the December 31,Year 1 balance sheet?

A)$601,500
B)$613,500
C)$615,000
D)$616,500

Question 50

On January 1,Year 1,Strang Incorporated issued bonds with a face value of $500,000,a stated rate of interest of 8%,and a 5-year term to maturity.The effective rate of interest was 10%.Interest is payable in cash on June 30 and December 31 of each year.Which of the following statements is true?

A)This bond was issued at a premium,and each semiannual cash payment is $25,000.
B)This bond was issued at a discount,and each semiannual cash payment is $20,000.
C)This bond was issued at a discount,and the annual interest expense is $40,000.
D)This bond was issued at a premium,and the annual interest expense is $40,000.

Question 51

Why are bonds sometimes issued at a discount?

A)The stated rate of interest is higher than the rate being paid on investments in the securities market with comparable risk.
B)The stated rate of interest is the same as the rate being paid on investments in the securities market with comparable risk.
C)The stated rate of interest is lower than the rate being paid on investments in the securities market with comparable risk.
D)The bonds are being issued between interest payment dates.

Question 52

[The following information applies to the questions displayed below.]

On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.


-Which of the following shows the effect of the first interest payment and amortization of the premium or discount on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 53

Which of the following statements regarding the stated rate of interest is true if a bond is sold at 101?

A)The stated rate equals the market rate.
B)The state rate is unrelated to the market rate.
C)The stated rate is higher than the market rate.
D)The stated rate is lower than the market rate.

Question 54

On January 1,Year 1,Sheffield Co.issued bonds with a face value of $200,000,a term of ten years,and a stated interest rate of 6%.The bonds were issued at 105,and interest is payable each December 31.Sheffield uses the straight-line method to amortize bond discounts and premiums.What is the carrying value of the bonds at December 31,Year 4?

A)$204,000
B)$200,000
C)$205,000
D)$206,000

Question 55

[The following information applies to the questions displayed below.]

On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.


-Which of the following shows the effect of the bond issuance on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 56

[The following information applies to the questions displayed below.]

On January 1, Year 1, Victor Company issued bonds with a $250,000 face value, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds sold at 95. Interest is payable in cash on December 31 of each year. Victor uses the straight-line method to amortize bond discounts and premiums.


-What is the carrying value of the bond liability at December 31,Year 3?

A)$241,000
B)$242,500
C)$237,500
D)$245,000

Question 57

On January 1,Year 1,Denver Co.issued bonds with a face value of $100,000,a stated rate of interest of 8%,and a 5-year term to maturity.The bonds were sold at 102.5.Denver uses the straight-line method to amortize bond discounts and premiums.What is the amount of interest expense during Year 1?

A)$7,500
B)$8,500
C)$8,000
D)$8,200

Question 58

Jacobs Company issued bonds with a $300,000 face value on January 1,Year 1.The bonds were issued at 102 and carried a 5-year term to maturity.They had a 9% stated rate of interest that was payable in cash on December 31st of each year.Jacobs uses the straight-line method to amortize bond discounts and premiums.Based on this information alone,how does the recognition of interest expense during Year 1 affect the company's accounting equation?

A)Decrease equity by $25,800,decrease liabilities by $1,200,and decrease assets by $27,000
B)Decrease both assets and stockholders' equity by $2,700
C)Decrease both assets and stockholders' equity by $25,800
D)Increase liabilities by $1,200,decrease assets by $25,800,and decrease equity by $27,000

Question 59

[The following information applies to the questions displayed below.]

On January 1, Year 1, Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. Interest is payable in cash on December 31 of each year. Wayne uses the straight-line method to amortize bond discounts and premiums.



-Assuming Wayne issued the bond for 102.5,what is the amount of interest expense that will be reported on the income statement for the year ending December 31,Year 1?

A)$34,500
B)$36,000
C)$37,500
D)$15,000

Question 60

[The following information applies to the questions displayed below.]

On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.


-On December 31,Year 5,Gordon Corporation makes the final entry to record interest and amortization.Immediately after that,Gordon pays off the bonds as scheduled.Which of the following shows the effect of the bond payoff on the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 61

Company A and Company B are identical in all regards except that during Year 1 Company A borrowed $40,000 at an interest rate of 10%.In contrast,Company B obtained financing by acquiring $40,000 from sale of common stock.Company B agreed to pay a $4,000 cash dividend each year.Both companies are in a 30% tax bracket.Which company would show the greater retained earnings at the end of Year 1,and by what amount?

A)Company A's retained earnings would be higher by $4,000.
B)Company B's retained earnings would be higher by $2,800.
C)Company A's retained earnings would be higher by $1,200.
D)Both would show the same retained earnings.

Question 62

[The following information applies to the questions displayed below.]

On January 1, Year 1, Echols Company borrowed $100,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $25,045.65.


-What is the amount of principal repayment included in the payment made on December 31,Year 1?

A)$20,000.00
B)$8,000.00
C)$25,045.65
D)$17,045.65

Question 63

The times-interest-earned ratio is calculated by which of the following?

A)Total assets divided by interest expense.
B)Net income divided by interest expense.
C)Earnings before interest and taxes divided by interest expense.
D)None of these answer choices are correct.

Question 64

On January 1,Year 1,Brown Co.issued bonds with a face value of $200,000,a stated rate of interest of 10%,and a 20-year term to maturity.The bonds were issued at face value.If Bluefield's tax rate is 40%,what is the after-tax cost of borrowing related to these bonds for Year 1?

A)$12,000
B)$8,000
C)$20,000
D)$28,000

Question 65

Which of the following conditions indicate a company has a relatively high level of financial risk?

A)A low times-interest-earned ratio
B)A low debt to assets ratio
C)A high return on equity
D)A high current ratio

Question 66

A company uses the effective interest method to amortize a bond discount.Which of the following statements is true regarding the interest expense that is recognized each year?

A)It will be greater than the interest payment.
B)It will increase from year to year.
C)It will remain the same from year to year.
D)It will be greater than the interest payment and it will also increase from year to year.

Question 67

On January 1,Year 1,Jack Incorporated borrows $38,000 to purchase a new company car by agreeing to a 6%,5-year note with the bank.Payments of $734.65 are due at the end of each month with the first installment due on January 31,Year 1.What are the amounts of interest and principal,respectively,that will be paid in the first month?

A)$544.65 and $190.00
B)$190.00 and $544.65
C)$2,280.00 and $544.65
D)$190.00 and $734.65

Question 68

[The following information applies to the questions displayed below.]

On January 1, Year 1, The Palms borrowed $200,000 to purchase a warehouse by agreeing to a 8%, 5-year note with the bank. Payments of $50,091.29 are due at the end of each year. The first payment will be made on December 31, Year 1.



-How much will the company still owe on the loan at the end of Year 2? (Round your final answer to the nearest dollar. )

A)$186,727
B)$184,000
C)$129,090
D)$165,910

Question 69

Gates,Inc.and Markham,Inc.each had the same financial position on January 1,Year 2.The following is a summary of each of their balance sheets on that date:

Gates is about to raise $200,000 in cash by issuing bonds.Markham is going to raise $200,000 on the same day by issuing common stock.Immediately after these transactions,which of the following statements will be correct?

A)Gates' current ratio will be higher than Markham's.
B)Gates' current ratio will be lower than Markham's.
C)Gates' debt to asset ratio will be higher than Markham's.
D)Gates' debt to asset ratio will be lower than Markham's.

Question 70

[The following information applies to the questions displayed below.]

On January 1, Year 1, Weller Company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8%. Interest is paid annually on December 31.


-Assuming Weller issued the bonds for $431,940,what is the carrying value of the bonds on the December 31,Year 3?

A)$420,615
B)$426,495
C)$414,264
D)$404,800

Question 71

[The following information applies to the questions displayed below.]

On January 1, Year 1, Weller Company issued bonds with a $400,000 face value, a stated rate of interest of 10%, and a 10-year term to maturity. Weller uses the effective interest method to amortize bond discounts and premiums. The market rate of interest on the date of issuance was 8%. Interest is paid annually on December 31.


-Assuming Weller issued the bond for $431,940,what is the amount of interest expense that will be recognized during Year 3?

A)$33,649
B)$20,000
C)$34,120
D)$46,350

Question 72

Loans that require payment of interest at regular intervals and payment of principal at maturity are installment notes.

Question 73

Which of the following statements is true when bonds are issued at a premium?

A)The carrying value decreases by equal amounts each year if straight-line amortization is used.
B)The carrying value decreases by equal amounts each year if effective interest amortization is used.
C)The carrying value decreases by larger and larger amounts each year if effective interest amortization is used.
D)The carrying value decreases by equal amounts each year if straight-line amortization is used and decreases by increasing amounts each year if effective interest amortization is used.

Question 74

Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?

A)Not having to pay back the principal
B)Ability to raise large amounts of capital
C)Tax-deductibility of interest
D)Tax-deductibility of dividends

Question 75

Thrasher Company reported income before taxes of $180,000.The company is in a 30% income tax bracket.Also,Thrasher's income statement contained a charge for interest expense amounting to $60,000.Based on this information alone,what is the company's times-interest-earned ratio?

A)2.1
B)3.0
C)3.1
D)4.0

Question 76

[The following information applies to the questions displayed below.]

On January 1, Year 1, The Palms borrowed $200,000 to purchase a warehouse by agreeing to a 8%, 5-year note with the bank. Payments of $50,091.29 are due at the end of each year. The first payment will be made on December 31, Year 1.



-What is the interest expense for Year 1 and Year 2,respectively? (Round your final answers to the nearest dollar. )

A)$3,200 and $14,000
B)$16,000 and $16,350
C)$16,000 and $13,273
D)$20,625 and $16,000

Question 77

[The following information applies to the questions displayed below.]

On January 1, Year 1, Echols Company borrowed $100,000 cash from Sun Bank by issuing a 5-year, 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan equals $25,045.65.


-Which of the following shows how the borrowing of cash from Sun Bank on January 1,Year 1,affects the elements of the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 78

Which of the following statements about installment notes is correct?

A)With each subsequent payment on an installment note,the amount of interest expense decreases.
B)With each subsequent payment on an installment note,the amount of interest expense increases.
C)With each subsequent payment on an installment note,the amount of the principal paid decreases.
D)With each subsequent payment on an installment note,the amount of the principal paid remains unchanged.

Question 79

A company uses the effective interest method to amortize a bond premium.Which of the following statements is true regarding the carrying value of the bond?

A)The carrying value will decrease by equal amounts each year.
B)The carrying value will decrease by smaller amounts each year.
C)The carrying value will decrease by larger amounts each year.
D)The carrying value will be lower than the face value of the bond until maturity.

Question 80

For a long-term note payable,repaying a portion of principal along with interest payments is called loan amortization.