Question 1

On January 1, 20A, Goldstein Company purchased a machine. The seller agreed that a total of $9,000 would be paid over a three-year period--$3,000 per year at the end of 20A, 20B, and 20C. At the time the machine was purchased, the market rate of interest was 10%. What amount should be debited to the asset account, Machinery, on the date of purchase (round to the nearest dollar)?
A) $9,000
B) $7,461
C) $9,016
D) $9,948

Accepted Answer

To determine the amount to be debited to the asset account, we need to calculate the present value of the three payments using the market rate of interest of 10%.

PV of annuity of $3,000 per year for three years at 10%:
$3,000 x [(1-1/(1+.10)^3)/.10] = $8,482

Therefore, the amount to be debited to the asset account is $8,482, rounded to the nearest dollar, which is Option B: $7,461.

Question 2

Kristen's grandmother promises to give her $3,000 at the end of three years and $4,000 at the end of four years. How much is the money worth today if Kristen could earn 6% annual interest on the funds?
A) $16,237
B) $21,879
C) $5,545
D) $5,687

Accepted Answer

D

Question 3

In 2014, P Co reported net earnings of $1,933 million, interest expense of $395 million and income taxes of $270 million. In 2013, they reported net earnings of $2,142 million, interest expense of $478 million and income taxes of $818 million. Calculate the times interest earned ratio for 2014 and 2013, respectively.
A) 6.05 and 5.48 times
B) 5.05 and 4.48 times
C) 5.73 and 6.19 times
D) 6.58 and 7.19 times

Accepted Answer

D

Question 4

Which of the following statements pertaining to instalment notes with blended principal and interest payments is correct?
A) The portion of each instalment applied to the interest and principal will remain constant.
B) The portion of the instalment applied to the interest will depend on prevailing market interest rates, with the difference being applied to the principal.
C) The portion of the instalment applied to the principal will increase, while the portion applied to the interest will decrease over time.
D) The portion of the instalment applied to the principal will decrease, while the portion applied to the interest will increase over time.

Accepted Answer

With instalment notes with blended principal and interest payments, the portion of the instalment applied to the principal will increase, while the portion applied to the interest will decrease over time. As the principal amount owed decreases, the amount of interest owed each month also decreases. Therefore, a larger portion of each instalment can be applied to the principal, reducing the overall interest paid over the term of the loan. This gradual decrease in interest payment and increase in principal payment is known as amortization.

Question 5

If there is a loss on bonds redeemed early, it is
A) reported as "Other Expense" on the statement of earnings.
B) debited to Interest Expense, as a cost of financing.
C) reported as part of earnings from operations on the statement of earnings.
D) debited directly to Retained Earnings.

Accepted Answer

A loss on bonds redeemed early is considered an "Other Expense" and is reported separately on the statement of earnings, not as part of operating earnings or directly affecting retained earnings.

Question 6

How much would Kristen have to deposit in the bank at the end of each of the next five years if she wishes to have $5,000 in the bank at the end of that time period, assuming she will be earning 6% annual rate of return? (Round to the nearest dollar).
A) $1,000
B) $1,187
C) $943
D) $887

Accepted Answer

The answer of How much would Kristen have to deposit...

Question 7

On January 1, 2013, Carter Ltd. issued a 15-year, $600,000 instalment note payable, with annual fixed principal payments of $40,000, plus 5% interest. The cash payment for the first year is:
A) $42,000
B) $70,000.
C) $30,000
D) $40,000.

Accepted Answer

The cash payment for the first year includes the fixed principal payment of $40,000 plus 5% interest on the entire $600,000, which is $30,000. Therefore, the total cash payment is $40,000 + $30,000 = $70,000.

Question 8

Positive financial leverage occurs in which of the following situations?
A) The company's after-tax return on total assets is less than the after-tax cost of borrowing.
B) Payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.
C) The return to the owners is enhanced through the use of debt financing.
D) Interest payments can be deducted for income tax purposes.

Accepted Answer

Positive financial leverage occurs when the return on investment of borrowed funds is higher than the cost of borrowing. Option C states that the return to the owners is enhanced through the use of debt financing, indicating positive financial leverage as the owners are able to earn a higher return on their investment than the cost of borrowing. The other options do not indicate positive financial leverage. Option A indicates negative financial leverage, option B indicates limited financial leverage, and option D indicates tax benefits but not necessarily positive financial leverage.

Question 9

Which of the following is true?
A) It is common for companies to both retire debt and issue new bonds in the same year as a way to replace higher interest rate debt with lower rate issuances.
B) The corporation will have to pay cash to bond investors when those investors demand to call the bonds.
C) Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.
D) Retractable bonds require cash outflow connected to investing when the issuing corporation redeems the bonds.

Accepted Answer

It is common for companies to retire high interest rate debt and issue new bonds with lower interest rates in the same year. This helps to lower the overall cost of borrowing for the corporation.

Option B is incorrect as bond investors cannot demand call of bonds, it is at the discretion of the issuing corporation. Option C is incorrect as payment of interest is an operating activity as it is a cost of doing business. Option D is incorrect as retractable bonds allow the bondholders to redeem the bond at a specified time, it is not the issuing corporation that redeems the bonds.

Question 10

There is a reciprocal relationship between which of the following?
A) Present value of $1 and the future value of $1.
B) Present value of the annuity of $1 and the future value of annuity of $1.
C) Future value of $1 and the future value of an annuity.
D) Present value of the annuity of $1 and the present value of $1.

Accepted Answer

The present value of $1 and the future value of $1 are reciprocals because the present value is the current worth of a future sum of money, while the future value is the amount a current sum will grow to over time.

Question 11

Bond discounts should be amortized to comply with the
A) revenue recognition principle.
B) matching process.
C) cost principle.
D) full disclosure principle.

Accepted Answer

Bond discounts should be amortized to comply with the matching process. The matching principle requires that expenses be recognized in the same period as the revenue they help generate. Amortizing the bond discount over the life of the bond helps align the cost of issuing the bond (the discount) with the periods in which the bond generates revenue.

Question 12

Kristen deposits $5,000 in the bank today. She will be earning 6% interest annually on her deposit. How much money will she have in the bank at the end of 5 years? (Round to the nearest dollar).
A) $21,062
B) $6,691
C) $28,186
D) $3,736

Accepted Answer

The future value of the deposit can be calculated using the formula for compound interest: FV = P(1 + r)^n, where P is the principal amount ($5,000), r is the annual interest rate (0.06), and n is the number of years (5). Plugging in the values, FV = 5000(1 + 0.06)^5 = 5000(1.338225) ≈ $6,691.

Question 13

Which of the following statements is not true?
A) The times interest earned ratio gives an indication of a company's ability to meet interest payments as they come due.
B) EBIT can be calculated by adding interest expense and income tax expense to net earnings.
C) The times interest earned ratio is calculated by dividing the sum of net earnings, interest expense, and income tax expense, by interest expense.
D) The higher a company's debt to total assets ratio, the lower the company's times interest earned ratio will be.

Accepted Answer

A higher debt to total assets ratio does not necessarily mean a lower times interest earned ratio, as the latter depends on earnings relative to interest expenses, not just the level of debt.

Question 14

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two equal payments after the acquisition date. What is the interest concept that best describes this application?
A) Future value of an annuity.
B) Future value of a single amount.
C) Present value of a single amount.
D) Present value of an annuity.

Accepted Answer

The application requires the computation of the cash equivalent price of a machine where the cost is to be paid in two equal installments. This is a scenario of a present value of an annuity. Therefore, option D, which is the Present Value of an Annuity, is the best choice.

Question 15

A $100,000 bond was retired at 95 when the carrying amount of the bond was $103,000. The entry to record the retirement would include a:
A) loss on bond redemption of $3,000.
B) gain on bond redemption of $3,000.
C) gain on bond redemption of $8,000.
D) loss on bond redemption of $8,000.

Accepted Answer

The bond was retired at 95% of its face value, which is $95,000. The carrying amount was $103,000, so the gain is $103,000 - $95,000 = $8,000.

Question 16

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions specified in the indenture?
A) Rate of interest to be paid.
B) Maturity date.
C) Cash to be received at the issue date.
D) Dates of interest payments.

Accepted Answer

The cash to be received at the issue date is not a provision specified in the indenture. It is determined by the market demand for the bond and the underwriting process. The rate of interest to be paid, maturity date, and dates of interest payments are all provisions included in the bond indenture.

Question 17

When a bond investment is sold (issued) at a discount, subsequent amortization of the discount does which of the following?
A) Decreases interest in the bond.
B) Decreases interest expense.
C) Has no effect upon interest expense.
D) Increases interest expense.

Accepted Answer

When a bond investment is sold at a discount, the amortization of the discount increases interest expense. This is because the initial bond price was less than its face value, and as the bond approaches maturity, the discount needs to be gradually amortized, which increases the interest cost over time.

Question 18

On November 1, 20A, Katz Company purchased twenty $1,000, 9% bonds (interest is payable each April 30, and October 31) at 97. What is the amount that should be recorded in the long-term investment account on November 1, 20A?
A) $20,000
B) $18,800
C) $20,600
D) $19,400

Accepted Answer

The bonds were purchased at 97, which means 97% of the face value. The face value of the bonds is $20,000 (20 bonds x $1,000 each). Therefore, the recorded amount is 97% of $20,000, which is $19,400.

Question 19

One thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issue is 
A) Choice A
B) Choice B
C) Choice C
D) Choice D

Accepted Answer

The answer of One thousand bonds with a face value...

Question 20

An amount is to be deposited in a savings account at the end of each year in order to provide funds for a trip to Europe, at the end of the fourth year. You have been asked to determine the amount of the annual deposit. What is the interest concept that best describes this application?
A) Future value of an annuity.
B) Future value of a single amount.
C) Present value of a single amount.
D) Present value of an annuity.

Accepted Answer

The interest concept that best describes this application is the future value of an annuity because the objective is to determine the amount of the annual deposit required to accumulate the needed funds in four years. This involves calculating the future value of a series of equal annual deposits at a given interest rate over a specified period of time.

Quiz 11: Reporting and Interpreting Stockholders Equity

Kristen's grandmother promises to give her $3,000 at the end of three years and $4,000 at the end of four years. How much is the money worth today if Kristen could earn 6% annual interest on the funds?

Which of the following statements pertaining to instalment notes with blended principal and interest payments is correct?

If there is a loss on bonds redeemed early, it is

How much would Kristen have to deposit in the bank at the end of each of the next five years if she wishes to have $5,000 in the bank at the end of that time period, assuming she will be earning 6% annual rate of return? (Round to the nearest dollar) .

On January 1, 2013, Carter Ltd. issued a 15-year, $600,000 instalment note payable, with annual fixed principal payments of $40,000, plus 5% interest. The cash payment for the first year is:

Positive financial leverage occurs in which of the following situations?

Which of the following is true?

There is a reciprocal relationship between which of the following?

Bond discounts should be amortized to comply with the

Kristen deposits $5,000 in the bank today. She will be earning 6% interest annually on her deposit. How much money will she have in the bank at the end of 5 years? (Round to the nearest dollar) .

Which of the following statements is not true?

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two equal payments after the acquisition date. What is the interest concept that best describes this application?

A $100,000 bond was retired at 95 when the carrying amount of the bond was $103,000. The entry to record the retirement would include a:

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions specified in the indenture?

When a bond investment is sold (issued) at a discount, subsequent amortization of the discount does which of the following?

On November 1, 20A, Katz Company purchased twenty $1,000, 9% bonds (interest is payable each April 30, and October 31) at 97. What is the amount that should be recorded in the long-term investment account on November 1, 20A?

One thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issue is

An amount is to be deposited in a savings account at the end of each year in order to provide funds for a trip to Europe, at the end of the fourth year. You have been asked to determine the amount of the annual deposit. What is the interest concept that best describes this application?