Deck 15: Non-Current Liabilities

Question 1

Most companies choose to issue debt because earnings per share and return on equity may be higher.

Answer 1

True

Question 2

Return on equity is often higher under debt financing because shareholder's equity is proportionately lower than profit.

Answer 2

True

Question 3

Non-current liabilities such as bonds payable and instalment notes payable are financial liabilities because there is a contract between two or more parties to pay cash in the future.

Answer 3

True

Question 4

Financial leverage refers to the practice of borrowing at one rate and investing at another.

Question 5

The maturity date of the bond is the date that the first interest payment is due.

Question 6

Dividends are tax deductible by the company.

Question 7

A bond issued by a corporation may be issued without the permission of the Board of Directors of the company.

Question 8

The face value of a bond is the amount of cash that the borrower receives at the start of the bond.

Question 9

One of the main decisions of a company considering financing is whether to issue debt or equity.

Question 10

The market rate of interest is the rate that investors demand for lending their money.

Question 11

Equity financing is riskier than debt financing because interest must be paid regularly and the principal must be paid on maturity.

Question 12

Debt financing will mean the company will pay less corporate income tax.

Question 13

When equity is issued, shareholder control is NOT affected.

Question 14

When debt is issued instead of equity, earnings per share may be higher.

Question 15

Bond issuances are more common in the first quarter of a company's fiscal year.

Question 16

Debt that is NOT current is non-current.

Question 17

When equity is issued instead of debt, the company will have an income tax savings.

Question 18

The present value of a bond is the value at which the bond would sell in the marketplace.

Question 19

The contractual interest rate and the market interest rate on a bond will always be equal.

Question 20

The contractual interest rate and the market interest rate on the bond will always be equal if the bond's present value equals the face value of the bond.

Question 21

A gain on redemption is recorded when the cash paid is more than the amortized cost of the bond.

Question 22

If bonds are issued at a discount, the issuing corporation will repay an amount less than the face amount of the bonds on the maturity date.

Question 23

A fixed interest rate means that the interest rate is constant for the entire length of the note payable.

Question 24

Bonds that mature in instalments are called term bonds.

Question 25

If $180,000, 9%, bonds are issued on January 1, and pay interest semi-annually, the amount of interest paid on July 1, will be $8,100.

Question 26

Term bonds are bonds that mature at a single specified future date.

Question 27

Debt to Total Assets measures the percentage of total assets that is financed by creditors rather than shareholders.

Question 28

When a bond discount is allocated to interest expense over the life of the bond, this process is called amortizing the discount.

Question 29

If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual rate of interest.

Question 30

Notes Payable are often traded on stock exchanges.

Question 31

If $100,000 face value bonds with a carrying value of $95,200 are redeemed at 97, a loss on redemption will be recorded.

Question 32

If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.

Question 33

The effective-interest method of amortization results in varying amounts of amortization, and interest expense per period but a constant rate of interest.

Question 34

Unsecured bonds have specific assets of the issuer pledged as collateral for the bonds.

Question 35

One of the differences between notes payable and bonds payable is that most notes are payable in a series of periodic payments, while bonds are normally repayable in full at maturity.

Question 36

The current market value of the bond is equal to the future value of all the present cash flows.

Question 37

When a bond is retired, a gain is recorded when the cash paid is less than the amortized cost.

Question 38

Instalment notes with blended payments are repayable in variable periodic amounts that include the principal and the interest.

Question 39

Under the effective interest method, the amount of premium or discount amortized is constant every period.

Question 40

The present value of bonds always equals the face value of the bonds if the market interest rate equals the contractual interest rate at the time of the issuance of the bonds.

Question 41

If a corporation issued $4,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

A) $2,000,000
B) $60,000
C) $200,000
D) $140,000

Question 42

Bonds that mature at a single specified future date are called

A) contractual bonds.
B) term bonds.
C) junk bonds.
D) debentures.

Question 43

The contractual rate of interest is always stated as a(n)

A) monthly rate.
B) daily rate.
C) semi-annual rate.
D) annual rate.

Question 44

Bonds that can be retired by the issuer at a stated dollar amount before they mature are known as

A) term bonds.
B) redeemable bonds.
C) debentures.
D) AAA bonds.

Question 45

From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is that

A) bond interest is deductible for tax purposes.
B) interest must be paid on a periodic basis regardless of earnings.
C) income to shareholders may increase as a result of trading on the equity.
D) the bondholders do not have voting rights.

Question 46

Which is a major shortcoming of issuing debt instead of equity?

A) Shareholder control is not affected.
B) Income tax payable will be less.
C) Interest must be paid regularly.
D) Dividends are not tax deductible.

Question 47

Common examples of non-current liabilities include all of the following EXCEPT

A) bonds payable.
B) instalment notes payable.
C) finance lease.
D) accounts payable.

Question 48

The debt to total assets is calculated by dividing total assets by total liabilities.

Question 49

Even if it is riskier to issue debt, most companies still choose to do this because

A) money that is borrowed increases earnings per share.
B) it produces a higher return on equity.
C) it does not affect shareholder control.
D) all of the above are correct.

Question 50

Bonds that are issued against the general credit of the issuer are termed

A) market value bonds.
B) redeemable bonds.
C) debentures.
D) junk bonds.

Question 51

Earnings per share is usually higher under debt financing because

A) more common shares are issued.
B) interest expense reduces profit.
C) no additional common shares are issued.
D) interest expense increases profit.

Question 52

Which of the following is a disadvantage of issuing bonds instead of common shares?

A) Shareholder control is not affected.
B) The principal of the debt must be repaid at maturity.
C) Income to common shareholders may increase.
D) Earnings per share will increase.

Question 53

The Interest coverage ratio indicates the company's ability to meet interest payments as they come due.

Question 54

Which of the following is the exception to the category non-current liability?

A) Accounts Payable
B) Mortgage Payable
C) Bond Payable
D) Note payable (due in 5 years)

Question 55

Which of the following are NOT affected by issuing equity?

A) Shareholder Control
B) Amount of Corporate Income Tax paid by a company
C) Earnings per Share
D) Return on Equity

Question 56

Shareholders of a company may be reluctant to finance expansion through issuing more equity because

A) leveraging with debt is always a better idea.
B) their earnings per share may decrease.
C) the price of the shares will automatically decrease.
D) dividends must be paid on a periodic basis.

Question 57

Within a corporation, formal approval is required before bonds can be issued by the

A) chief executive officer.
B) board of directors.
C) controller.
D) provincial government.

Question 58

Junk bonds are bonds that

A) are of good quality and have a low credit risk.
B) are registered in the name of the owner.
C) are considered speculative and have a high risk of default.
D) are unsecured.

Question 59

Financing by creditors is less risky than financing provided by shareholders.

Question 60

Which of the following statements are correct in regards to financial leverage?

A) Financial leverage is said to be 'negative' if the rate of return is higher than the borrowing rate.
B) Financial leverage is said to be 'positive' if the rate of return is lower than the rate of borrowing.
C) Financial leverage is borrowing at one rate and investing at a different rate.
D) Financial leverage can decrease the return on equity.

Question 61

Use the following exhibit for questions $$\begin{array} { l l l l l } \frac { \text { Bonds } } { \text { Bombardier } } & \frac { \text { Coupon } } { 7.350 } & \frac { \text { Maturity Date } } { \text { Dec. } 22 / 26 } & \frac { \text { Bid } \$ } { 103.12 } & \frac { \text { Yield } \% } { 6.35 }\end{array}$$

-The contractual interest rate of the Bombardier bonds is

A) less than the market rate of interest.
B) greater than the market rate of interest.
C) equal to the market rate of interest.
D) not determinable.

Question 62

The present value of a bond is also known as its

A) face value.
B) market price.
C) future value.
D) deferred value.

Question 63

If bonds with a face value of $20,000 are redeemed before maturity when the amortized cost of the bonds is $18,000, the entry to record the redemption will include a debit to

A) Bonds Payable for $20,000.
B) Bonds Payable for $18,000.
C) Interest Payable for $2,000.
D) Bonds Payable equal to the market price of the bonds on the date of conversion.

Question 64

If bonds have been issued at a discount, over the life of the bonds, the

A) amortized cost of the bonds will decrease.
B) amortized cost of the bonds will increase.
C) interest expense will decrease, if the discount is being amortized on a effective interest basis.
D) unamortized discount will increase.

Question 65

If bonds are issued at a discount, it means that the

A) financial strength of the issuer is suspect.
B) market interest rate is higher than the contractual interest rate.
C) market interest rate is lower than the contractual interest rate.
D) bondholder will receive effectively less interest than the contractual rate of interest.

Question 66

The carrying value (amortized cost) of bonds will equal the market price

A) at the close of every trading day.
B) at the end of the fiscal period.
C) on the date of issue.
D) every six months on the date interest is paid.

Question 67

When recording a retirement of bonds, a company must account for all of the following EXCEPT

A) the payment of cash to the bondholders.
B) the removal of the bond from the company's accounting records.
C) the recognition of any gain or loss on redemption.
D) the receipt of cash from the bondholders.

Question 68

The interest expense recorded on an interest payment date is increased

A) by the amortization of premium on bonds payable.
B) by the amortization of discount on bonds payable.
C) only if the bonds were sold at face value.
D) only if the market rate of interest is less than the stated rate of interest on that date.

Question 69

When authorizing bonds to be issued, the board of directors does NOT specify the

A) total number of bonds authorized to be sold.
B) contractual interest rate.
C) selling price.
D) total face value of the bonds.

Question 70

The market rate of interest is often called the

A) stated rate.
B) effective rate.
C) coupon rate.
D) contractual rate.

Question 71

If the market rate of interest is 5%, a $10,000, 6%, 10-year bond that pays interest semi-annually would sell at an amount

A) less than face value.
B) equal to the face value.
C) greater than face value.
D) that cannot be determined.

Question 72

Torrez Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2013, at 97. The journal entry to record the issue will show a

A) debit to Cash for $1,000,000.
B) credit to Discount on Bonds Payable for $30,000.
C) credit to Bonds Payable for $1,000,000.
D) debit to Cash for $970,000.

Question 73

$5 million, 5%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of

A) $500,000 received for 10 periods must be calculated.
B) $5 million received in 10 periods must be calculated.
C) $5 million received in 20 periods must be calculated.
D) $250,000 received for 10 periods must be calculated.

Question 74

Use the following exhibit for questions $$\begin{array} { l l l l l } \frac { \text { Bonds } } { \text { Bombardier } } & \frac { \text { Coupon } } { 7.350 } & \frac { \text { Maturity Date } } { \text { Dec. } 22 / 26 } & \frac { \text { Bid } \$ } { 103.12 } & \frac { \text { Yield } \% } { 6.35 }\end{array}$$

-On the day of trading referred to above,

A) the bond will mature on Dec. 22 or Dec. 26.
B) bonds with market prices of $7.35 were traded.
C) the bond is selling for 103.12% of face value.
D) the bond sold for $6.35.

Question 75

If the market rate of interest is greater than the contractual rate of interest, bonds will sell

A) at a premium.
B) at face value.
C) at a discount.
D) only after the stated rate of interest is increased.

Question 76

The present value of a $10,000, 5-year bond, will be less than $10,000 if the

A) contractual rate of interest is less than the market rate of interest.
B) contractual rate of interest is greater than the market rate of interest.
C) bond is redeemable.
D) contractual rate of interest is equal to the market rate of interest.

Question 77

A company should retire bonds early only if

A) interest rates have risen significantly.
B) it has sufficient cash.
C) shareholders agree to the retirement.
D) the bonds were initially sold at a discount.

Question 78

If there is a loss on bonds redeemed before maturity, it is

A) debited directly to Retained Earnings.
B) reported as "Other Expenses" on the income statement.
C) reported as a reduction in interest revenue on the income statement.
D) debited to Interest Expense, as a cost of financing.

Question 79

A $1,000 face value bond with a quoted price of 97 is selling for

A) $1,000.
B) $970.
C) $907.
D) $97.

Question 80

The sale of bonds above face value

A) is a rare occurrence.
B) will cause the total cost of borrowing to be less than the bond interest paid.
C) will cause the total cost of borrowing to be more than the bond interest paid.
D) will have no net effect on Interest Expense by the time the bonds mature.