Question 1

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 2

[APPENDIX] Deferred tax is an amount that reconciles the differences between the income for financial purposes with the income reported for tax purposes.In most cases, it is a long-term liability.

Accepted Answer

Deferred tax is generally a long-term liability that reflects the future tax consequences of transactions or events that have been recognized in the financial statements but not yet recognized in the tax return.

Question 3

Convertible bonds are attractive to investors because

Accepted Answer

Convertible bonds offer investors the option to convert the bonds into a specified number of shares of the issuer's stock at a predetermined conversion price. This offers investors the potential for capital appreciation if the stock price rises, while also providing downside protection in the form of the bond's guaranteed yield and return of principal at maturity. The other choices (A, B, and D) do not accurately describe the unique features of convertible bonds.

Question 4

Which of the following statements regarding bonds payable is true?

Accepted Answer

Most bonds are term bonds, which means that the entire principal amount will mature on a single date. Choice A is incorrect because bond denominations can vary, although $100 is a common denomination. Choice B is incorrect because the company does not receive any proceeds when bonds are traded in the secondary market. Choice C is incorrect because a debenture bond is not backed by specific assets of the issuing company.

Question 5

[APPENDIX] Temporary differences occur when an item affects both book and tax calculations but not in the same time period.

Accepted Answer

Temporary differences arise when an item affects the tax and book calculations, but the timing of the item's recognition differs between the two calculations. This creates a timing difference, which results in a temporary difference.

Question 6

Irwin, 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 for bonds is $1,000, so if Irwin, Inc. issued $41,000,000 of bonds, they would have sold 41,000 bonds ($41,000,000 / $1,000 per bond = 41,000 bonds).

Question 7

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?
A) Current liability
B) Long-term liability
C) Current asset
D) Long-term liability

Accepted Answer

The answer of The current portion of long-term debt is...

Question 8

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

Accepted Answer

Accrued income taxes are classified as current liabilities because they are expected to be paid within the next year, not long-term liabilities. The remaining options, deferred income taxes, bonds payable, and pension obligations, are all appropriate long-term liabilities.

Question 9

On January 2, 2016, 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

At the maturity date, Roof Master would repay the bondholders the face value of the bonds, which is $500,000, regardless of the issue price.

Question 10

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 is a long-term liability because it represents a financial obligation that will not be satisfied within the current operating cycle of the company. It is often classified as a non-current liability on the balance sheet.

Question 11

[APPENDIX] The Deferred Tax account should reflect permanent differences but not items that are temporary differences between book accounting and tax reporting.

Accepted Answer

The Deferred Tax account reflects temporary differences between book accounting and tax reporting, not permanent differences. Permanent differences do not reverse over time, whereas deferred taxes are meant to capture the future tax effects of those temporary differences that will reverse.

Question 12

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 liability that is expected to be paid within a year, making it a current liability.

Question 13

Which of the following statements regarding serial bonds is true?

Accepted Answer

The statement "The bonds do not all mature on the same date" is true. Serial bonds are issued with different maturity dates, so that the issuer can pay off small portions of the debt over time, instead of having to make one large payment at maturity.

Question 14

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 bonds a more attractive option for companies looking to finance their operations.

Question 15

[APPENDIX] A permanent difference with respect to taxes is a difference that affects the tax records but not the accounting records, or vice versa.

Accepted Answer

A permanent difference affects only the tax records and does not affect the accounting records.

Question 16

The change in the Deferred Taxes account is reflected in the Operating Activities category of the statement of cash flows.

Accepted Answer

The change in Deferred Taxes account is considered a non-cash item and is reflected in the Operating Activities section of the statement of cash flows as it affects the company's net income.

Question 17

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 usually done when prevailing interest rates are lower than the bonds' coupon rate, allowing the company to issue new debt at a lower cost. Therefore, option B is correct as the issuing company is likely to retire the bonds before maturity if the bonds are paying 9% interest while the market rate of interest is 6%. Option A is incorrect as the investor does not have the right to retire the bonds, only the issuing company does. Option C is incorrect as the bonds can remain outstanding until the maturity date, but it's at the discretion of the issuing company. Option D is incorrect as the redemption price is usually specified in the bond indenture before the bonds are issued.

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 a promise to pay back the principal and interest in the future, which is recorded as a liability (bonds payable). This transaction increases both assets and liabilities.

Question 19

A convertible bond is one where

Accepted Answer

A convertible bond is a type of corporate bond that gives the holder the option to convert the bond into a predetermined number of shares of the issuer's common stock at a future date. Therefore, the correct answer is D.

Question 20

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

Accepted Answer

Long-term liabilities are obligations that will not be satisfied within one year or the current operating cycle, whichever is longer. Examples of long-term liabilities include bonds, other long-term loans, and deferred income taxes. Accounts payable and accrued expenses are considered current liabilities because they will be paid off within one year.

Quiz 10: Long-Term Liabilities