Question 1

The entry to record the issuance of bonds between interest payment dates will include a debit to Bond Interest Expense.

Accepted Answer

The answer of The entry to record the issuance of...

Question 2

It is the bondholder rather than the issuer who may exercise the call feature of a callable bond.

Accepted Answer

The call feature of a callable bond allows the issuer to redeem the bond before its maturity date. It is the issuer who has the right to exercise the call feature, not the bondholder. However, the bondholder may be affected if the bond is called early, as they would receive their principal back earlier than expected and may need to reinvest that money at a potentially lower interest rate.

Question 3

A company with income before income taxes of $96,000,and $20,000 in interest expense,has an interest coverage ratio of

Accepted Answer

Interest coverage ratio = EBIT / Interest expense= 96,000 / 20,000= 4.8 times

Question 4

Which of the following is an example of off-balance-sheet financing?

Accepted Answer

Off-balance-sheet financing refers to financing activities that are not reported on a company's balance sheet. Leases are a common example of off-balance-sheet financing as they involve the use of assets without actually owning them, and therefore may not be recorded as liabilities on the balance sheet. Bonds, notes, and dividends are all financing activities that would be recorded on a company's balance sheet.

Question 5

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value,a gain will result.

Accepted Answer

If bonds are retired by an issuer by purchase on the open market at a price below the bonds' carrying value, the issuer will record a gain on the retirement since the purchase price is less than the carrying value of the bonds.

Question 6

Deferred income taxes arise when

Accepted Answer

Deferred income taxes result from temporary differences between the financial reporting basis and the tax basis of assets and liabilities. This occurs when there is a discrepancy between financial reporting requirements (generally accepted accounting principles, or GAAP) and income tax filing requirements (tax laws). As a result, the taxable income and tax expense reported on the financial statements may be different from the amounts reported on the tax return.

Question 7

The debt to equity ratio is expressed in terms of

Accepted Answer

The debt to equity ratio is expressed in terms of "times," indicating how many times the total debt is compared to the shareholders' equity.

Question 8

Under a defined contribution pension plan,

Accepted Answer

The answer of Under a defined contribution pension plan,
...

Question 9

Which of the following qualifies as a capital lease?

Accepted Answer

A lease qualifies as a capital lease if it meets at least one of the four criteria: (1) the lease transfers ownership of the asset to the lessee at the end of the lease term, (2) the lease contains a bargain purchase option, (3) the lease term is equal to or greater than 75% of the asset's estimated economic life, or (4) the present value of the lease payments is equal to or greater than 90% of the asset's fair market value. In this scenario, option C is the only lease that meets one of these criteria, as it has a lease term equal to the machine's useful life. Options A, B, and D do not meet any of the criteria for a capital lease.

Question 10

Under a capital lease,the lessee does not record which of the following?

Accepted Answer

Rent expense is not recorded under a capital lease because the payments made by the lessee are considered to be payments towards the purchase of the asset. Instead, the lessee records depreciation on the leased asset and recognizes the capital lease obligations and capital lease assets on the balance sheet.

Question 11

Issuing bonds between interest payment dates will have the effect of decreasing a bond issuance discount or increasing a bond issuance premium.

Accepted Answer

The answer of Issuing bonds between interest payment dates will...

Question 12

Other postretirement benefits should be expensed

Accepted Answer

Other postretirement benefits, such as healthcare or life insurance, are earned by the employee as they work for the company. Therefore, they should be expensed as the employee earns them. This is typically done using an actuarial calculation to estimate the present value of the benefit earned each year.

Question 13

The cash received on bonds issued at face value and between interest dates is less than the bonds' face value.

Accepted Answer

When bonds are issued at face value between interest dates, the cash received includes the face value plus accrued interest, making it more than just the face value.

Question 14

The interest coverage ratio equals income before income taxes plus interest expense divided by

Accepted Answer

The answer of The interest coverage ratio equals income before...

Question 15

Under an operating lease,the lessee

Accepted Answer

Under an operating lease, the lessee records the periodic lease payments as Rent Expense, rather than as a capital lease obligation. This is because the lessee does not assume the risks and rewards of ownership of the leased asset, and therefore does not record it as a capital lease. Additionally, the lessor retains ownership of the leased asset and therefore records the depreciation on the asset, not the lessee.

Question 16

An adjustment must be made at the end of an accounting period to accrue the interest expense on bonds payable and to amortize any related premium or discount from the last interest payment date to the end of the fiscal year.

Accepted Answer

Accruing interest expense and amortizing premium or discount on bonds payable is required at the end of an accounting period in accordance with Generally Accepted Accounting Principles (GAAP).

Question 17

Which of the following statements best describes the behavior over time of the components of equal mortgage payments?

Accepted Answer

In equal mortgage payments, each payment includes both payment of principal and interest expense. Over time, the proportion of each component changes. Initially, a larger portion of the payment goes towards interest expense and a smaller portion towards payment of principal. However, as time passes, the amount of principal left on the mortgage decreases, which means that less interest is charged on the outstanding balance. Therefore, the proportion of the payment that goes towards payment of principal increases, while the proportion that goes towards interest expense decreases. This is reflected in choice B.

Question 18

When bonds are converted to stock,any excess carrying value of the bonds over the par value of the stock is to be recorded as Additional Paid-in Capital.

Accepted Answer

This is true as when bonds are converted to stock, the carrying value of the bonds is transferred to the stock account and any excess carrying value over the par value of the stock is recorded as Additional Paid-in Capital.

Question 19

The advantages of financial leverage accrue primarily to

Accepted Answer

The advantages of financial leverage, such as increased return on investment and earnings per share, ultimately benefit stockholders as they receive higher returns on their investments.

Question 20

All of the following are operating leases except a

Accepted Answer

A, B, and C are all examples of financing leases, where the lessee is effectively purchasing the asset over time through lease payments. D, on the other hand, has a clear option to purchase the asset for a small amount at the end of the lease term, indicating that it is an operating lease.

Quiz 10: Long-Term Liabilities