Question 1

The current portion of long-term debt is a balance sheet item for Flavorful Products Company. How would it most likely be classified on the balance sheet?

Accepted Answer

The current portion of long-term debt represents the portion of long-term debt that is due within one year. As such, it is considered a current liability and would be classified as such on the balance sheet.

Question 2

Convertible bonds are attractive to investors because

Accepted Answer

Convertible bonds can be attractive to investors because they have the potential to be converted into stock at the investor's option, which can provide upside potential if the stock price increases. This feature allows investors to benefit from the bond's interest payments while also having the opportunity to participate in potential capital appreciation.

Question 3

A convertible bond is one where

Accepted Answer

A convertible bond is a type of bond that can be converted into shares of stock in the issuing company at a future time. The conversion rate and date are specified in the bond's prospectus. This feature provides the bondholder with the potential for capital appreciation if the stock price rises, while still receiving regular interest payments until they convert the bond.

Question 4

When determining the amount of interest to be paid on a bond, which of the following information is not necessary?

Accepted Answer

The selling price of the bonds is not necessary to determine the amount of interest to be paid. Interest payments are calculated based on the face amount of the bond and the face rate of interest, not the selling price.

Question 5

Which of the following statements regarding bonds payable is true?

Accepted Answer

Most bonds are term bonds, meaning that the entire principal amount will mature on a single date. Option A is incorrect because bonds can be issued in various denominations. Option B is incorrect because the issuing company does not receive any proceeds from secondary market transactions. Option C is incorrect because a debenture bond is an unsecured bond and is not backed by any specific assets of the issuing company.

Question 6

Rent owed to the landlord is a balance sheet item for Generic Products Company. How would it most likely be classified on the balance sheet?

Accepted Answer

Rent owed to the landlord is a current obligation that needs to be paid in the short-term, typically within the next 12 months. Therefore, it would be classified as a current liability on the balance sheet.

Question 7

Bonds in the amount of $100,000 and a life of 10 years were issued by the Focus Company. If the face rate is 6% and interest is paid semiannually, what would be the total amount of interest paid over the life of the bonds?

Accepted Answer

The total interest paid over the life of the bonds is calculated by multiplying the face value ($100,000) by the annual interest rate (6%), and then by the number of years (10). Since interest is paid semiannually, the annual interest of $6,000 is paid twice a year, resulting in $12,000 paid annually for 10 years, totaling $120,000. However, the question asks for the total amount of interest, not the total payments, which includes the principal. The correct calculation for just the interest is $6,000 * 10 = $60,000.

Question 8

Bonds are a popular source of financing because

Accepted Answer

Bond interest expense is deductible for tax purposes, while dividends paid on stock are not. This makes financing through bonds a more attractive option for companies looking to minimize their tax liabilities.

Question 9

Bennington Corp. issued a $40,000, 10-year bond at the face rate of 8%, paid semiannually. How much cash will the bond investors receive at the end of the first interest period?

Accepted Answer

The semiannual interest payment is calculated as: 
$40,000 (face value) x 8% (annual interest rate) / 2 (semiannual payments) = $1,600 
Therefore, bond investors will receive $1,600 in cash at the end of the first interest period.

Question 10

The bond issue price is determined by calculating the

Accepted Answer

The bond issue price is determined by calculating the present value of the stream of interest payments and the present value of the maturity amount. This is because bond pricing is based on the principle of the time value of money, which states that money is worth more in the present than in the future. As a result, the future cash flows (interest payments and maturity amount) must be discounted back to their present value in order to determine the fair price of the bond.

Question 11

If a company's bonds are callable,

Accepted Answer

If a company's bonds are callable, it means that the issuing company has the right to retire the bonds before the maturity date. This is typically done by paying the bondholders the face value of the bonds plus any applicable call premium. If the bonds are paying a higher interest rate than the current market rate, the company is likely to retire the bonds early in order to save money on interest payments. Therefore, choice B is the best answer. Choices A, C, and D are not accurate regarding callable bonds.

Question 12

Which of the following statements is correct?

Accepted Answer

The actual issue price of a bond represents the present value of all future cash flows related to the bond, which includes not only the face value but also the interest payments over the life of the bond. The market rate of interest and other factors affect the present value calculation and thus influence the selling price of the bonds. Choices A, B, and D are all incorrect.

Question 13

On January 2, 2015, Roof Master Construction, Inc. issued $500,000, 10-year bonds for $574,540. The bonds pay interest on June 30 and December 31. The face rate is 8% and the market rate is 6%. At the maturity date, besides an interest payment, Roof Master would repay the bondholders

Accepted Answer

The answer of On January 2, 2015, Roof Master Construction,...

Question 14

Which of the following items should not appear in the long-term liability section of the balance sheet?

Accepted Answer

Accrued income taxes should appear in the current liability section of the balance sheet as it is expected to be paid within the next year. Long-term liability section includes only obligations that are expected to be paid beyond one year, such as deferred income taxes, bonds payable, and pension obligations.

Question 15

Which of the following statements is true with respect to long-term liabilities?

Accepted Answer

Long-term liabilities are obligations that will be satisfied over a period of time greater than one year. Accounts payable are typically short-term liabilities. Accrued expenses are also typically short-term liabilities. Long-term liabilities include obligations such as bonds, other long-term loans, and deferred income taxes.

Question 16

Micro Company wishes to issue $400,000 of 5-year, 6% bonds, with interest paid annually at the end of the year. The market rate of interest is currently 5%. What information is needed in order to determine the selling price?

Accepted Answer

The face amount of the bonds, the stated rate of interest, the market rate of interest, and the bond life are all necessary to calculate the selling price of the bonds. The bond rating and purpose of the issue may also affect the selling price, but are not essential pieces of information for this calculation.

Question 17

Crystal, Inc. issued $41,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds sold was

Accepted Answer

The most common denomination of bonds is $1,000. Therefore, the number of bonds sold would be $41,000,000/$1,000 = 41,000.

Question 18

When bonds are issued by a company, the accounting entry shows an

Accepted Answer

When a company issues bonds, it receives cash (an asset) in exchange for taking on the obligation to pay back the bondholders in the future, which is recorded as a liability. This transaction increases both assets and liabilities on the balance sheet.

Question 19

A ten-year lease obligation appears on the balance sheet of Generic Products Company. How would it most likely be classified on the balance sheet?

Accepted Answer

A ten-year lease obligation would be classified as both a long-term liability and a current liability on the balance sheet, with the portion due within one year as a current liability and the remainder as a long-term liability.

Question 20

Which of the following statements regarding serial bonds is true?

Accepted Answer

Serial bonds are a type of bond where the bonds do not all mature on the same date, but instead mature at different intervals. This is in contrast to term bonds which all mature on the same date. Serial bonds may be issued by any type of company, not just food companies. The strength of the bond's backing by collateral would depend on the specific terms and conditions of the bond.

Quiz 10: Long-Term Liabilities