Question 1

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

Accepted Answer

This is the definition of an annuity - a series of payments of equal amount made at equal time intervals, often used for retirement savings or investments.

Question 2

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.

Accepted Answer

This is the definition of a lease agreement.

Question 3

If the borrower fails to pay a mortgage, most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

Accepted Answer

If the borrower fails to pay the mortgage, the lender has the right to foreclose on the property that was pledged as security for the loan.

Question 4

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

Accepted Answer

Operating leases are long-term leases in which the risks and rewards of ownership remain with the lessor, not the lessee. They are also usually cancelable with notice.

Question 5

Bonds may only be issued on an interest payment date.

Accepted Answer

Bonds may be issued on any date, not just an interest payment date. However, the first interest payment date is typically set for a certain time period after the bond issuance.

Question 6

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

Accepted Answer

A basic present value concept is that cash received today is worth more than the same amount of cash received in the future due to the time value of money and inflation.

Question 7

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

Accepted Answer

The present value of an annuity is the sum of the present values of each individual payment.

Question 8

A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

Accepted Answer

A pension plan is indeed a contractual agreement between an employer and its employees, where the employer promises to provide retirement benefits to employees after they retire.

Question 9

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

Accepted Answer

Bond financing involves borrowing money from investors rather than selling ownership in the company. As a result, issuing bonds does not dilute existing owner control.

Question 10

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

Accepted Answer

This is the time value of money principle, which accounts for the fact that money can earn interest over time, so a dollar today is worth more than a dollar received in the future.

Question 11

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.

Accepted Answer

The return on equity equation is net income divided by shareholders' equity. If the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquisition, the net income will increase, leading to a higher return on equity.

Question 12

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.

Accepted Answer

This statement is true. The carrying value of a long-term note is the present value of all remaining future payments, discounted using the market rate at the time of issuance. This reflects the current value of the liability on the company's financial statements.

Question 13

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

Accepted Answer

This is correct. The interest payment on a bond is typically calculated by multiplying the par value (also known as face value or principal) by the stated contract rate or coupon rate. This determines the annual interest payment, which is then divided into periodic payments (such as quarterly or semi-annual) that the bondholder receives.

Question 14

The type of bond that provides the greatest security from theft of loss is the debenture.

Accepted Answer

The type of bond that provides the greatest security from theft or loss is actually a secured bond, which is backed by collateral. A debenture is an unsecured bond, meaning it is not backed by any specific collateral, and therefore does not provide as much security from theft or loss.

Question 15

A common payment pattern for installment notes is to pay the accrued interest periodically and to pay the principle amount on the maturity date.

Accepted Answer

The answer of A common payment pattern for installment notes...

Question 16

An advantage of bonds is that interest does not have to be paid.

Accepted Answer

Bonds do require the payment of interest to bondholders as a form of compensation for loaning money to the issuer.

Question 17

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.

Accepted Answer

This is true. If the bond's interest period does not align with the issuing company's accounting period, an adjusting entry must be made to recognize the interest expense accruing between the most recent interest payment and the end of the accounting period. This ensures that the financial statements accurately reflect the company's financial performance and position.

Question 18

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

Accepted Answer

An installment note is a type of loan that requires the borrower to make a series of payments to the lender over a set period of time. The borrower may be an individual or a company, and the lender may be a bank or other financial institution. The payments are typically made on a monthly or quarterly basis, and the loan may be secured or unsecured depending on the circumstances. The terms of the loan, including the interest rate, repayment period, and payment schedule, are usually spelled out in the loan agreement.

Question 19

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

Accepted Answer

The answer of Bonds and long-term notes are similar in...

Question 20

The present value of an annuity factor for six years at 10% is 4.3553. This means that the present value of an annuity of six annual $2,000 payments at 10% would equal $8,711.

Accepted Answer

The calculation is as follows: 
PV = PMT x Present Value of Annuity Factor 
PV = $2,000 x 4.3553 = $8,710.60 (rounded to nearest cent) 
Therefore, the statement is true.

Quiz 10: Accounting for Long-Term Liabilities