Question 1

On January 1, a 7-year, $8,000, non-interest-bearing note payable was issued when the market rate of interest was 7%. What amount should be recorded for the note on the balance sheet at the issue date?
A)$3,570
B)$4,982
C)$11,241
D)$37,725

Accepted Answer

To calculate the amount of the non-interest-bearing note payable, we need to find the present value (PV) of the future payments using the market rate of interest.
PV = FV / (1 + i)n
PV = 8,000 / (1 + 0.07)7
PV = $4,982
Therefore, the amount recorded for the note on the balance sheet at the issue date is $4,982. Answer choice B is correct.

Question 2

Companies generate assets in three different ways. They are
A)equity contributed by owners, borrowings, and receivables from affiliates.
B)equity issuances, borrowings, and interest rates.
C)borrowings, profitable operations, and equity issuances.
D)equity issuances, debt issuances, and financial instruments.

Accepted Answer

Companies generate assets through borrowings (taking loans), profitable operations (generating income through business activities), and equity issuances (selling company shares to raise capital).

Question 3

A five-year, non-interest-bearing, $5,000 note, dated January 1, 2017, has a present value of $3,917. The market rate of interest is 5%. Interest expense for the period ending December 31, 2017, is
A)$392.
B)$196.
C)$250.
D)$217.

Accepted Answer

The present value of the note is $3,917, which means that is the amount that would need to be invested today at the market rate of interest (5%) in order to have $5,000 in five years.

To calculate interest expense for the first year (ending December 31, 2017), we need to determine the interest rate that was used to discount the note. We can solve for this rate using present value formula:

Present value = Future value / (1 + interest rate)n

$3,917 = $5,000 / (1 + interest rate)5

Solving for the interest rate, we get 4%. This is the rate that was used to discount the note.

Interest expense for the first year can now be calculated:

Interest expense = outstanding balance x market interest rate 
Outstanding balance = face value of note - amount of principal paid 
Amount of principal paid = 0 (since this is a non-interest bearing note)

Outstanding balance = $5,000 
Interest expense = $5,000 x 5% = $250

Therefore, the answer is B) $196.

Question 4

A coupon payment is
A)the payment of principal that is the 'coupon' of the total payments.
B)the amount of interest expense reported on the income statement.
C)calculated by multiplying the book value of the bonds times the effective rate of interest.
D)the amount paid to bondholders on each interest payment date.

Accepted Answer

A coupon payment is the amount paid to bondholders on each interest payment date. It represents the interest expense that the issuer of the bond pays to the holder of the bond as a percentage of the face value of the bond. The coupon rate is usually fixed at issuance, but the actual amount of the coupon payment depends on the face value of the bond and the prevailing interest rate in the market.

Question 5

Darren Company issued $8,000 of 8% bonds on January 1, 2017, at a discount of $940. The market rate of interest on the issue date was 10%. The carrying value of the bonds on December 31, 2017 is
A)$6,994.
B)$7,060.
C)$8,940.
D)$7,126.

Accepted Answer

The bond's face value is $8,000 and it was issued at a discount of $940, so the initial carrying value was $7,060 ($8,000 - $940). The market rate of interest on the issue date was 10%, while the bond's coupon rate is 8%. Since the market rate of interest is higher than the coupon rate, the bond was issued at a discount.

To calculate the carrying value of the bond on December 31, 2017, we need to determine the amount of interest expense for the year. The interest expense is calculated as follows:
($7,060 carrying value at beginning of year) x (10% market interest rate) = $706 interest expense for the year

Since the bond's coupon rate is 8%, the interest payment for the year is:
($8,000 face value) x (8% coupon rate) = $640 interest payment for the year

Therefore, the reduction in the carrying value of the bond for the year is:
$706 interest expense - $640 interest payment = $66 reduction in carrying value

Thus, the carrying value at the end of the year is:
$7,060 carrying value at beginning of year - $66 reduction in carrying value = $6,994 carrying value at end of year

Therefore, the answer is D ($7,126).

Question 6

Which one of the following is not one of the three contractual kinds of notes?
A)Non-interest-bearing note
B)Interest-bearing notes
C)Installment notes
D)Bank notes

Accepted Answer

Bank notes are not one of the three contractual kinds of notes. The three kinds of notes are non-interest-bearing note, interest-bearing notes, and installment notes. Bank notes refer to a type of monetary instrument issued by a bank that promises to pay the bearer a certain amount of money upon demand.

Question 7

RJC Company issued $8,000 of 10% bonds on January 1, 2017. The bonds were issued at a premium. The cash payment for annual interest on the bonds
A)is equal to annual interest expense.
B)is greater than annual interest expense.
C)is less than annual interest expense.
D)equals the balance in Premium on Bonds Payable on the day the bonds were issued.

Accepted Answer

When bonds are issued at a premium, the cash payment for annual interest is greater than the annual interest expense because the premium reduces the interest expense over the life of the bond.

Question 8

If interest expense is less than the contractual interest payment, then
A)the note was issued at a premium.
B)the note was issued at a discount.
C)the note was issued at par.
D)the company should refinance the note to get a better interest rate.

Accepted Answer

If interest expense is less than the contractual interest payment, it means the company is paying less interest than what is required by the terms of the note. This implies that the note was issued at a premium, where the company received more cash than the face value of the note, and hence is paying less interest on a relative basis.

Question 9

Bonds payable that are redeemed by the issuer
A)typically pay far less interest than the market rate of interest.
B)are considered unsecured.
C)have no market value.
D)are repurchased or retired.

Accepted Answer

Bonds payable that are redeemed by the issuer are either repurchased or retired. This means that the issuer buys back the bonds from the investors, either before or at the maturity date, at a price determined by the bond's face value and any applicable premium or discount. Redeemed bonds may have a market value, which is the price that investors may buy or sell them for in the secondary market. The interest paid by redeemed bonds may be either higher or lower than the market rate, depending on the terms of the bond contract and the prevailing interest rates. The security of redeemed bonds may vary, depending on whether they are secured or unsecured bonds.

Question 10

A provision of a contractual obligation that is designed to protect the interest of lenders is called
A)a lenders' security provision
B)a restrictive covenant.
C)a non-interest-bearing obligation.
D)collateral.

Accepted Answer

A restrictive covenant is a provision in a contract that limits or prevents certain actions by one of the parties. In the context of lending, a restrictive covenant is often included in loan agreements to protect the lender's interests by placing limitations on the borrower's activities that could affect the ability to repay the loan. Examples of restrictive covenants in loan agreements might include limitations on the amount of debt the borrower can incur or restrictions on investments the borrower can make.

Question 11

A non-interest-bearing note was recorded in the accounting records. The book value of the note
A)remains the same during the maturity period.
B)decreases during the maturity period.
C)increases throughout the maturity period.
D)is reported on income statement.

Accepted Answer

Non-interest-bearing notes are recorded at a discount, and their book value increases over time as the discount is amortized up to the face value of the note by the maturity date.

Question 12

The amount of amortized bond premium
A)reduces interest expense on the income statement.
B)is reported as a deduction from bonds payable on the balance sheet.
C)is reported as an addition to bonds payable on the balance sheet.
D)is added to the present value of bonds.

Accepted Answer

The amount of amortized bond premium reduces interest expense on the income statement. This is because the premium is the difference between the purchase price of the bond and its face value, which results in a lower effective interest rate. The premium is amortized over the life of the bond, which means it is gradually reduced and added to interest expense on the income statement.

Question 13

On January 1, a 3-year, $8,000, non-interest-bearing note payable was issued when the market rate of interest was 11%. To determine the amount at which the note will be valued on the balance sheet on the issue date, use the
A)present value of $1 table.
B)future value of an annuity due table.
C)present value of an annuity table.
D)future value of an annuity table.

Accepted Answer

The note is a non-interest-bearing note, which means the interest cost is embedded in the note's face value. To determine its value on the balance sheet at issuance, the present value of the note's future payment (the face value) needs to be calculated using the market rate of interest. The present value of $1 table is used for this purpose, as it provides the factor to discount a single future payment back to its present value at a given interest rate over a specific period of time.

Question 14

If interest expense is equal to the contractual interest payment, then
A)the note was issued at a premium.
B)the note was issued at a discount.
C)the note was issued at par.
D)It cannot be determined from the information given.

Accepted Answer

If interest expense is equal to the contractual interest payment, it means that there was no premium nor discount on the note. This implies that the note was issued at its par value.

Question 15

A call provision in a bond contract may specify that the issuing company
A)can issue the bonds at any interest rate it can entice the investors to accept.
B)must make periodic interest payments.
C)must deposit cash in the bank to be available when the bonds mature.
D)may buy back bonds from the investors.

Accepted Answer

A call provision in a bond contract allows the issuing company to buy back bonds from investors before their maturity date. This is typically done when interest rates have fallen and the company can issue new bonds at a lower interest rate, saving money on interest payments. It gives the issuer the flexibility to adjust its debt structure according to market conditions.

Question 16

Which type of note consists of periodic payments covering both interest and principal?
A)Interest-bearing bond
B)Receivable note
C)Non-interest-bearing note
D)Installment note

Accepted Answer

An installment note consists of periodic payments covering both interest and principal. Interest-bearing bonds also have periodic interest payments, but they may not necessarily include principal payments until maturity. Receivable notes and non-interest-bearing notes do not necessarily have periodic payments.

Question 17

Which one of the following bonds is considered unsecured?
A)$50,000, 8%, debenture bonds
B)$100,000, 12%, restricted bonds
C)$20,000, 10%, five-year callable bonds
D)$40,000, 6%, collateralized bonds

Accepted Answer

Debenture bonds are considered unsecured because they are not backed by any collateral or physical assets; instead, they are backed only by the issuer's creditworthiness and reputation.

Question 18

The actual interest rate used to calculate the interest payments by the issuer of the obligation is
A)the market rate of interest.
B)the effective interest rate.
C)the stated interest rate.
D)equal to the actual interest expense rate.

Accepted Answer

The stated interest rate is the rate specified in the bond or loan agreement that the issuer uses to calculate interest payments.

Question 19

On January 1, a 6-year, $5,000, non-interest-bearing note payable was issued when the market rate of interest was 8%. The present value of the note is
A)$3,151.
B)$2,080.
C)$865.
D)$5,000.

Accepted Answer

Using the Present Value formula:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the market interest rate, and n is the number of years.

In this case, FV = $5,000, r = 8%, and n = 6 years. Plugging these values into the formula, we get:

PV = $5,000 / (1 + 0.08)^6
PV = $5,000 / 1.586874
PV = $3,150.93

Rounding to the nearest dollar, the present value of the note is $3,151. Therefore, the best choice is A.

Question 20

A debt covenant
A)serves to give assurance to a creditor that the debtor will have the ability to pay interest and principal at maturity.
B)serves to give assurance to the debtor that the interest rate is reasonable.
C)allows the creditor to become an owner of the company if the covenant is violated.
D)allows the debtor to forego any interest on the debt.

Accepted Answer

A debt covenant is a legally binding agreement between a lender and a borrower that outlines certain terms and conditions of the loan. The purpose of a debt covenant is to give assurance to the creditor that the debtor will have the ability to pay interest and principal at maturity. This helps to minimize the risk to the creditor by ensuring that the borrower has the financial capacity to meet their obligations under the loan.

Quiz 11: Long-Term Liabilities: Notes, Bonds, and Leases

On January 1, a 7-year, $8,000, non-interest-bearing note payable was issued when the market rate of interest was 7%. What amount should be recorded for the note on the balance sheet at the issue date?

Companies generate assets in three different ways. They are

A five-year, non-interest-bearing, $5,000 note, dated January 1, 2017, has a present value of $3,917. The market rate of interest is 5%. Interest expense for the period ending December 31, 2017, is

A coupon payment is

Darren Company issued $8,000 of 8% bonds on January 1, 2017, at a discount of $940. The market rate of interest on the issue date was 10%. The carrying value of the bonds on December 31, 2017 is

Which one of the following is not one of the three contractual kinds of notes?

RJC Company issued $8,000 of 10% bonds on January 1, 2017. The bonds were issued at a premium. The cash payment for annual interest on the bonds

If interest expense is less than the contractual interest payment, then

Bonds payable that are redeemed by the issuer

A provision of a contractual obligation that is designed to protect the interest of lenders is called

A non-interest-bearing note was recorded in the accounting records. The book value of the note

The amount of amortized bond premium

On January 1, a 3-year, $8,000, non-interest-bearing note payable was issued when the market rate of interest was 11%. To determine the amount at which the note will be valued on the balance sheet on the issue date, use the

If interest expense is equal to the contractual interest payment, then

A call provision in a bond contract may specify that the issuing company

Which type of note consists of periodic payments covering both interest and principal?

Which one of the following bonds is considered unsecured?

The actual interest rate used to calculate the interest payments by the issuer of the obligation is

On January 1, a 6-year, $5,000, non-interest-bearing note payable was issued when the market rate of interest was 8%. The present value of the note is

A debt covenant