Question 1

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Accepted Answer

The answer of A lessee has substantially all of the...

Question 2

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Accepted Answer

A low level of liabilities in relation to stockholders' equity corresponds to a low debt-to-equity ratio, as debt is a liability and stockholders' equity is the shareholders' portion of the company's assets.

Question 3

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Accepted Answer

When bonds are issued at a price lower than their par value, it results in a discount on bonds payable. The discount is amortized and reduces the bond interest expense over the life of the bond.

Question 4

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. Interest is payable each June 30 and December 31. The total interest expense on the bond over its eight-year life is $400,000.

Accepted Answer

The answer of On January 1, a company issued a...

Question 5

A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's financing structure decreased during Year 2.

Accepted Answer

The statement is false. An increase in debt-to-equity ratio indicates that the company has taken on more debt relative to equity, which increases the risk in the firm's financing structure. Therefore, the degree of risk in the firm's financing structure increased during Year 2.

Question 6

The carrying (book)value of a bond at the time it is issued is always equal to its par value.

Accepted Answer

The answer of The carrying (book)value of a bond at...

Question 7

A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.

Accepted Answer

The calculation is correct. 10 years = 20 semiannual periods. Each period has an interest payment of $4,000 ($100,000 x 0.08 / 2). At the end of the 10 years, the issuer must also repay the par value of $100,000.

Question 8

The use of debt financing ensures an increase in return on equity.

Accepted Answer

The answer of The use of debt financing ensures an...

Question 9

When the contract rate on a bond issue is less than the market rate, the bonds sell at a discount.

Accepted Answer

When the contract rate on a bond issue is less than the market rate, the bonds are less attractive to investors as they can get a higher rate of return by investing their money elsewhere. As a result, the bond price will need to be lowered to make it more attractive, resulting in the bonds selling at a discount.

Question 10

When the contract rate is above the market rate, a bond sells at a discount.

Accepted Answer

When the contract rate is above the market rate, a bond sells at a premium, not a discount. When the contract rate is below the market rate, a bond sells at a discount.

Question 11

A company's ability to issue unsecured debt depends on its credit standing.

Accepted Answer

A company's credit standing determines its ability to borrow money and issue debt, including unsecured debt. Lenders and investors assess the company's creditworthiness before offering funding, and a company with a strong credit rating is more likely to be able to secure unsecured debt.

Question 12

Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

Accepted Answer

Bond interest paid is considered an expense because it is a cost of borrowing money. Dividends, on the other hand, are paid out of the company's profits and are not considered an expense.

Question 13

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

This is because the return on equity is calculated as the net income divided by the total equity, and acquiring assets with a higher expected rate of return will increase the net income, thus leading to a higher return on equity. However, if the interest rate on the debt is higher than the expected rate of return on the acquired assets, it will increase the cost of borrowing and reduce the net income, leading to a lower return on equity.

Question 14

The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.

Accepted Answer

This is because the longer the time period to maturity, the higher the likelihood of events such as changes in interest rates, inflation, and economic or political instability, all of which can negatively impact the value of the bond. As a result, investors demand a higher rate of return (yield) to compensate for this additional risk.

Question 15

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by total stockholders' equity.

Question 16

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Accepted Answer

The answer of Collateral from unsecured loans may be sold...

Question 17

The contract rate on previously issued bonds changes as the market rate of interest changes.

Accepted Answer

The answer of The contract rate on previously issued bonds...

Question 18

A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.

Accepted Answer

Debt-to-equity ratio is calculated as total liabilities divided by total equity.

Debt-to-equity ratio = Total Liabilities / Total Equity

From the information given, we can find that the total equity is:

Total Equity = Assets - Total Liabilities 
Total Equity = $350,000 - $200,000 
Total Equity = $150,000

Now, we can calculate the debt-to-equity ratio as:

Debt-to-equity ratio = Total Liabilities / Total Equity 
Debt-to-equity ratio = $200,000 / $150,000 
Debt-to-equity ratio = 1.33

Therefore, the correct answer is B) False.

Question 19

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

Accepted Answer

The debt-to-equity ratio is a commonly used financial ratio that compares a company's total liabilities to its total shareholders' equity to evaluate its financial leverage. It provides insight into the riskiness of a company's financing structure and its ability to pay off its debt obligations. Therefore, statement A is true.

Question 20

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

Accepted Answer

The carrying (book) value of a bond payable is the par value of the bonds plus any unamortized discount or minus any unamortized premium.

Quiz 14: Long-Term Liabilities