Question 1

Why would a corporation issue bonds payable instead of issuing stock?

Accepted Answer

Issuing bonds payable is a form of debt financing which generally carries a lower cost of capital compared to issuing stock. This is because the interest payments on bonds are tax-deductible, whereas dividends paid on stock are not. Additionally, issuing bonds does not dilute ownership of the corporation like issuing stock would.

Question 2

Define financial leverage and discuss how it is used to increase earnings per share.

Accepted Answer

The answer of Define financial leverage and discuss how it...

Question 3

When bonds are issued at face value,________.

Accepted Answer

When bonds are issued at face value, the amount of cash received is equal to the face value of the bonds. Therefore, there is no bond discount or premium to be amortized over the life of the bonds. As a result, for each interest payment, the amount of Interest Expense equals the amount of cash paid. The journal entry to record the issuance of the bonds includes a debit to the Cash account and a credit to the Bonds Payable account for the face value of the bonds.

Question 4

On July 1,2018,Shannon Equipment Dealer issued $590,000 of 6% bonds payable that mature in seven years.These bonds were issued at face value and pay interest each June 30 and December 31.Each semiannual interest payment will be higher than the interest expense.

Accepted Answer

Each semiannual interest payment will be equal to the interest expense because the bonds were issued at face value, and the interest rate is fixed at 6%. Interest expense is calculated based on the face value and the stated interest rate, so if the bonds are issued at face value, the interest payment equals the interest expense.

Question 5

Complete the following table:

Accepted Answer

The answer of Complete the following table:
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Question 6

Bonds affect the percentage of ownership of a corporation.

Accepted Answer

Bonds do not affect the percentage of ownership of a corporation. Bond holders are creditors of the corporation and have no ownership rights or voting power.

Question 7

Unlike cash dividends,which are optional payments to stockholders,the interest payments on bonds are required.

Accepted Answer

The statement is true. Bond issuers are required to make interest payments to bondholders as part of the contractual obligations of the bond. In contrast, cash dividends are optional payments at the discretion of the company's board of directors.

Question 8

Campbell,Inc.has net income of $500,000 and 200,000 shares of common stock.The company is considering a project that requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures,Campbell's management is of the opinion that the funds raised can be used to increase income before interest and taxes by $300,000 each year.The company estimates income tax expense to be 40%.Analyze the Campbell situation to determine which plan will result in higher earnings per share.(Round your answers to two decimal points. )

Accepted Answer

The answer of Campbell,Inc.has net income of $500,000 and 200,000...

Question 9

Which of the following statements is TRUE if a bond is issued for an amount higher than face value?

Accepted Answer

When a bond is issued for an amount higher than its face value, it means the bond's stated interest rate is higher than the prevailing market interest rate at the time of sale. Investors are willing to pay more than the face value to receive the higher interest payments associated with the bond.

Question 10

List three disadvantages of borrowing.

Accepted Answer

The answer of List three disadvantages of borrowing....

Question 11

On July 1,2018,Jordie Equipment Dealer issued $600,000 of 9% bonds payable that mature in seven years.These bonds were issued at face value and pay interest each June 30 and December 31.Each semiannual interest payment is $27,000.

Accepted Answer

The bonds were issued at face value, so the amount of the bond issue is equal to the face value. The semiannual interest payments of $27,000 each add up to an annual interest payment of $54,000, which is 9% of the face value of the bond issue ($54,000/$600,000 = 0.09). Therefore, the stated interest rate of 9% matches the actual interest payments.

Question 12

Debt is a less expensive source of capital than stock.

Accepted Answer

Debt is typically less expensive than stock because lenders expect less return on their investment than shareholders. Additionally, interest on debt is tax-deductible, reducing the overall cost of the debt. However, relying too heavily on debt can also be risky as it increases the company's leverage and financial obligations.

Question 13

On November 1,2018,Arch Services issued $313,000 of eight-year bonds with a stated rate of 12% at par.Interest payments occur each April 30 and October 31.On December 31,2018,Arch made an adjusting entry to accrue interest at year-end.What is the amount of Interest Expense that will be recorded on December 31,2018? (Do not round any intermediate calculations,and round your final answer to the nearest dollar. )

Accepted Answer

Interest Expense = $313,000 × 12% × 2/12 = $6260

Question 14

On July 1,2018,Mason & Beech Services issued $33,000 of 10% bonds that mature in five years.They were issued at par.The bonds pay semiannual interest payments on June 30 and December 31 of each year.On December 31,2018,what is the total amount paid to bondholders?

Accepted Answer

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Question 15

Which of the following statements is TRUE if a bond is issued at an amount less than its face value?

Accepted Answer

When a bond is issued at a discount (less than its face value), it typically means that the bond's stated interest rate is lower than the prevailing market interest rate at the time of sale. Investors require a higher yield due to the lower interest rate on the bond, leading to the bond being sold for less than its face value to compensate.

Question 16

Earning more income on borrowed money than the related interest expense is called ________.

Accepted Answer

This is the definition of financial leverage, which occurs when a company borrows money at a lower interest rate than the return it earns on that borrowed money. The difference between the two rates results in increased profits for the company. The other choices (operating leverage, annuity, and amortization) do not relate to this concept.

Question 17

The interest rate that investors demand to earn for loaning their money is known as the ________.

Accepted Answer

The market interest rate is the rate that investors demand for loaning their money, and it is determined by supply and demand factors in the market. The other answer options (stated interest rate, coupon rate, differential rate) refer to specific types of interest rates, but not the rate that investors demand in the market.

Question 18

Financial leverage occurs when a company earns less income on borrowed money than the related interest expense.

Accepted Answer

Financial leverage occurs when a company earns more income on borrowed money than the related interest expense.

Question 19

On November 1,2018,Cleveland Services issued $305,000 of five-year bonds with a stated rate of 12%.The bonds were issued at par,and Cleveland makes semiannual payments on April 30 and October 31.On December 31,2018,Cleveland made an adjusting entry to accrue interest at year-end.No further entries were made until April 30,2019,when the first payment was made.What amount of interest expense was recorded for the period of January 1 to April 30,2019? (Do not round any intermediate calculations,and round your final answer to the nearest dollar. )

Accepted Answer

Interest Expense = $305,000 × 12% × 4/12 = $12,200

Question 20

Which of the following statements is TRUE if a bond is issued for an amount equal to its face value?

Accepted Answer

If a bond is issued for an amount equal to its face value, it means that the bond is sold at par. This indicates that the bond's stated interest rate is the same as the prevailing market interest rate at the time of sale.

Quiz 14: Long-Term Liabilities