Deck 10: Liabilities

Question 1

On December 31, 20X1, Bennett recorded an adjusting entry to account for interest that had accrued on the note. What is the approximate amount of interest expense that would have accrued at December 31, 20X1?

A) $25,402
B) $32,000
C) $76,200
D) $96,000

Answer 1

$25,402

Question 2

Accrued interest was recorded annually. On December 31, 20X3, the due date of the note, Bennett paid the amount due and recorded the transaction with which of the following?

A) A debit to notes payable for $400,000.
B) A debit to notes payable for $317,520.
C) A credit to notes payable for $400,000.
D) A credit to notes payable for $317,520.

Answer 2

A debit to notes payable for $400,000.

Question 3

A bond issue is a form of

A) Equity financing
B) Debt financing
C) collateral
D) Bank loan

Answer 3

Debt financing

Question 4

On January 1, 20X1, Tie Company purchased a machine that had a sticker (list) price of $22,000. The seller agreed to allow Tie Company to pay for the machine over a three-year period at 10% interest on the unpaid balance and with equal payments of $8,444 due at the end of 20X1, 20X2, and 20X3. What is the amount that should be debited to the asset account, Machinery, on the day the contract was initiated is (rounded to the nearest dollar)?

A) $20,999
B) $22,000
C) $25,332
D) $27,865

Question 5

Positive ?nancial leverage occurs in which of the following situations?

A) Interest payments can be deducted for income tax purposes.
B) The company's after-tax return on total assets is less than the after-tax cost of borrowing.
C) The return to the owners is enhanced through the use of debt ?nancing.
D) Payment of resources to creditors is limited to the required interest payments while the return of the principal borrowed is not required.

Question 6

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two equal payments after the acquisition date. What is the interest concept that best describes this application?

A) Present value of a single amount.
B) Present value of an annuity.
C) Future value of a single amount.
D) Future value of an annuity.

Question 7

When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the following are not provisions speci?ed in the indenture?

A) Dates of interest payments.
B) Rate of interest to be paid.
C) Cash to be received at the issue date.
D) Maturity date.

Question 8

On Bennett's 20X1 year-end statement of ?nancial position, the book value of the liability for notes payable related to this purchase would equal which of the following?

A) $317,520
B) An amount less than $317,520.
C) An amount more than $317,520.
D) An amount more or less than $317,520 depending upon Bennett's income for the year.

Question 9

On January 1, 20X3, Carter Ltd. issued a 15-year, $600,000 note payable, with annual ?xed principal payments of $40,000, plus 5% interest. The cash payment for the ?rst year is:

A) $30,000
B) $40,000.
C) $42,000
D) $70,000.

Question 10

Note disclosures for long-term debt generally include all of the following EXCEPT

A) call provisions and conversion privileges.
B) names of signi?cant debt holders.
C) assets pledged as security.
D) restrictions imposed by creditors.

Question 11

On January 1, 20X6, Goldstein Company purchased a machine. The seller agreed that a total of $9,000 would be paid over a three-year period--$3,000 per year at the end of 20X6, 20X7, and 20X8. At the time the machine was purchased, the market rate of interest was 10%. What amount should be debited to the asset account, Machinery, on the date of purchase (round to the nearest dollar)?

A) $7,461
B) $9,000
C) $9,016
D) $9,948

Question 12

Assume that you borrow $10,000 at an annual interest rate of 6%. Your loan agreement calls for monthly payments of $200, which include both interest and principal. Your first payment is made one month after you received the loan. The amount of interest and principal applied to your first instalment, respectively, would be:

A) $140 and $60.
B) $150 and $50.
C) $50 and $150.
D) $60 and $150.

Question 13

On January 1, 20X1, Ross Company acquired a truck that had a purchase price of $20,000. The seller agreed to allow Ross to pay for the truck over a two-year period at 10% interest with equal payments due at the end of 20X1 and 20X2. What is the amount of each annual payment the company must make (round to the nearest dollar)?

A) $11,524
B) $14,151
C) $17,751
D) $22,267

Question 14

Bonds usually are issued to obtain cash for what purpose?

A) Meeting working capital needs.
B) Acquisitions of long-term assets.
C) Purchasing insurance.
D) Investing in short-term marketable securities.

Question 15

Mastertack Inc. bought an asset and signed a four-year non-interest-bearing note for the full amount. If the note were recorded at its face value, which of the following statements would be true?

A) Both assets and liabilities will be overstated
B) Both assets and liabilities will be understated
C) Only liabilities will be overstated
D) Only liabilities will be understated

Question 16

Most of the information regarding a company's long term debt can be found:

A) on the cash ?ow statement.
B) in the annual report.
C) on the balance sheet.
D) in the notes to the ?nancial statements.

Question 17

Which of the following statements pertaining to instalment notes with blended principal and interest payments is correct?

A) The portion of each instalment applied to the interest and principal will remain constant.
B) The portion of the instalment applied to the principal will increase, while the portion applied to the interest will decrease over time.
C) The portion of the instalment applied to the principal will decrease, while the portion applied to the interest will increase over time.
D) The portion of the instalment applied to the interest will depend on prevailing market interest rates, with the difference being applied to the principal.

Question 18

If the market interest rate is higher than the coupon interest rate (or stated rate) of the bond, the bond sells:

A) at face value.
B) at a premium.
C) at a discount.
D) It is undeterminable.

Question 19

Tech Magic purchased a new computer system and in return signed a three-year $30,000 non- interest-bearing note payable. An investigation by the company's accountant revealed that similar notes have market rates of interest around 8%. At what amount should the note payable be initially recorded on Chi's ?nancial statements?

A) $25,771
B) $30,000
C) $23,815
D) $25,770

Question 20

Bonds payable usually are classi?ed on the statement of ?nancial position as which of the following?

A) Current liabilities.
B) Long-term liabilities.
C) Investments and funds.
D) Current assets.

Question 21

On January 1, 20X1, A-Ace Corp. issued $3,000,000 par value 12%, 10 year bonds which pay interest each December 31. If the market rate of interest was 14%, what should the issue price of the bonds be? (The present value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The present value of an annuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)

A) $2,686,896
B) $2,843,172
C) $3,000,000
D) $3,339,084

Question 22

Which of the following is true?

A) It is common for companies to both retire debt and issue new bonds in the same year as a way to replace higher interest rate debt with lower rate issuances.
B) Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.
C) Retractable bonds require cash out?ow connected to investing when the issuing corporation redeems the bonds.
D) The corporation will have to pay cash to bond investors when those investors demand to call the bonds.

Question 23

The amortization of a bond discount results in periodic interest expense

A) greater than the constant percentage of the carrying amount of the bonds.
B) less than the constant percentage of the carrying amount of the bonds.
C) equal to the constant percentage of the carrying amount of the bonds.
D) increasing over the term of the bond issue.

Question 24

On the maturity date of bonds payable after interest has been paid, the issuing company will do which of the following?

A) Record a loss of the market rate of interest on the maturity date exceeds the stated rate of interest.
B) Pay bondholders the original amount the bondholders paid to purchase the bonds.
C) Debit Bonds Payable and credit Cash for the par value of the bonds.
D) Debit Cash and credit Bonds Payable for the carrying amount of the bonds.

Question 25

If a bond is issued at a premium, the coupon rate is:

A) equal to the effective rate.
B) greater than the effective rate.
C) less than the effective rate.
D) not used to determine the bond's sale price.

Question 26

When a bond is issued at a discount, the amount of interest expense for an interest period is calculated by multiplying the _______ amount times the _______ interest rate during the period.

A) carrying, market
B) face, market
C) carrying, stated
D) face, stated

Question 27

Which of the following statements is not true?

A) The times interest earned ratio gives an indication of a company's ability to meet interest payments as they come due.
B) The times interest earned ratio is calculated by dividing the sum of net earnings, interest expense, and income tax expense, by interest expense.
C) EBIT can be calculated by adding interest expense and income tax expense to net earnings.
D) The higher a company's debt to total assets ratio, the lower the company's times interest earned ratio will be.

Question 28

In 20X4, P Co reported net earnings of $1,933 million, interest expense of $395 million and income taxes of $270 million. In 20X3, they reported net earnings of $2,142 million, interest expense of $478 million and income taxes of $818 million. Calculate the times interest earned ratio for 20X4 and 20X3, respectively.

A) 5.05 and 4.48 times
B) 6.58 and 7.19 times
C) 5.73 and 6.19 times
D) 6.05 and 5.48 times

Question 29

The times interest earned ratio is calculated by dividing

A) net earnings by interest expense.
B) net earnings before income taxes by interest expense.
C) net earnings before interest expense by interest expense.
D) net earnings before interest expense and income taxes by interest expense.

Question 30

When a bond investment is sold (issued) at a discount, subsequent amortization of the discount does which of the following?

A) Decreases interest expense.
B) Increases interest expense.
C) Has no effect upon interest expense.
D) Decreases interest in the bond.

Question 31

Bond discounts should be amortized to comply with the

A) cost principle.
B) matching process.
C) revenue recognition principle.
D) full disclosure principle.

Question 32

When the bond liability reported on the statement of ?nancial position increases each year, this indicates that the bond was:

A) issued at face value.
B) issued at a discount.
C) issued at a premium.
D) issued at net realizable value.

Question 33

Tasker Inc. earned a gross profit of $300,000 on sales of $1,200,000 during 20X3. The company also had operating expenses of $180,000. These operating expenses included interest expense of $40,000. The company is subject to an effective tax rate of 30%. What is the company's times interest earned ratio for the year?

A) 4 times
B) 4.5 times
C) 5 times
D) 3.2 times

Question 34

In 20X4, H Co's times interest earned ratio was 2.51 while T Co's ratio for that year was .80. Which of the following statements is false?

A) H Co's ratio appears to provide adequate coverage of interest from its present net earnings.
B) Since H Co's is actively pursuing growth through investment in other companies, its ratio may improve once those investments begin to generate additional net earnings.
C) T Co's ratio is very low and they present high risk to their creditors and investors.
D) H Co.'s ratio shows an extra margin of risk in case pro?tability deteriorates.

Question 35

If a bond is issued at a discount, the coupon rate is:

A) equal to the effective rate.
B) greater than the effective rate.
C) less than the effective rate.
D) not used to determine the bond's sale price.

Question 36

The times interest earned ratio is calculated by dividing

A) net earnings by interest expense.
B) net earnings before income taxes by interest expense.
C) net earnings before interest expense by interest expense.
D) net earnings before interest expense and income taxes by interest expense.

Question 37

On January 1, 20X7, Tio Rinto Aluminum Co. issued a $500,000, 6%, 8-year bond with interest payable semi-annually at par. The issuance price of the bond and the first period's interest expense are closest to
$\begin{array} { lr r } & \text { Issue price } & \text { Interest expense } \\\end{array}$
a) $\begin{array} { lr r } & \$ 500,000 & \$ 15,000 \\\end{array}$
b) $\begin{array} { lr r } & \$ 500,000 & \$ 30,000 \\\end{array}$
c) $\begin{array} { lr r } & \$ 470,000 & \$ 15,000 \\\end{array}$
d) $\begin{array} { lr r } & \$ 470,000 & \$ 30,000 \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D)Choice D

Question 38

Which item listed below does not in?uence the issue price (present value) of a bond?

A) The reason the bond was issued
B) The dollar amounts to be received
C) The length of time until the amounts are received
D) The market rate of interest

Question 39

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

A) carrying amount of the bonds will decrease.
B) carrying amount of the bonds will increase.
C) interest expense will decrease.
D) unamortized discount will increase.

Question 40

In 20X4, C Co. reported a times interest earned ratio of 12.33 times while P Co. reported a ratio of 11.07 times. Which of the following statements is false?

A) P Co. and C Co. have more than adequate ratios demonstrating their ability to cover interest charges with their earnings levels.
B) C Co's ratio is about 11.3% higher than P Co's ratio.
C) C Co. is more liquid than P. Co.
D) Lenders would be pleased with the ratios of both companies and be willing to lend them money for future expansion.

Question 41

The amortization of bond premium by the issuer will do which of the following?

A) Decrease interest expense.
B) Increase interest expense.
C) Have no effect on interest expense.
D) Determine the cash paid for interest.

Question 42

Accurate Numbers, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 20X1, for $102,360 on April 1, 20X1. The bonds pay interest on April 1 and October 1. Straight-line amortization is used by the company. What entry is needed at October 1 for the first interest payment?
a)
$\begin{array}{|l|r|r|}\hline \text { Interest expense } & 5,882 & \\\hline \text { Premium on bonds payable } & 118 & \\\hline \text { Cash } & & 6,000\\\hline\end{array}$

b)
$\begin{array}{|l|r|r|}\hline \text { Interest expense } & 6,118 & \\\hline \text { Discount on bonds payable } & 118 & \\\hline \text { Cash } & & 6,000 \\\hline\end{array}$

c)
$\begin{array}{|l|r|r|}\hline \text { Interest expense } & 6,000 & \\\hline \text { Premium on bonds payable } & 118 & \\\hline \text { Cash } & & 6,118\\\hline\end{array}$

d)
$\begin{array}{|l|r|r|}\hline \text { Interest expense } & 6,000 & \\\hline \text { Cash } & & 6,000 \\\hline\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 43

If a bond payable is sold (issued) at a premium, the amount of the carrying value (the long-term liability) reported on the subsequent statements of ?nancial position does which of the following?

A) Remains constant.
B) Decreases each year.
C) Increases each year.
D) Changes from year to year depending upon the market rate of interest each year.

Question 44

A corporation recently retired $1,000,000 worth of bonds early for $997,500. They reported a gain related to the retirement of the bonds of $24,250. What was the unamortized bond discount or premium at the time of retirement?

A) $24,250 premium
B) $26,750 premium
C) $21,750 discount
D) $21,750

Question 45

Bonds issued at a premium reduce:

A) the perceived risk to the bondholder.
B) the cost of borrowing.
C) the bond value to be shown on the balance sheet.
D) the interest payments to be made to the bondholder.

Question 46

Alimentation Deslauriers has a $100,000 bond outstanding with an unamortized discount of $5,679. The company has decided to retire the bonds for a cost of $103,000. The journal entry to record the retirement of the banks will include which of the following?

A) Loss on redemption of bonds, $5,679.
B) Loss on redemption of bonds, $8,679
C) Gain on redemption of bonds, $5,679.
D) Gain on redemption of bonds, $8,679

Question 47

The amortization of bond premium by the issuer will do which of the following?

A) Decrease interest expense.
B) Increase interest expense.
C) Have no effect on interest expense.
D) Determine the cash paid for interest.

Question 48

On December 31, 20X1, Dive Company sold $100,000, ten-year, 8% bonds at 104.5. The bonds were dated January 1, 20X1, and interest is payable each June 30 and December 31. The company uses the straight-line amortization method. The company should report the long-term liability (carrying value) for the bonds on the December 31, 20X1, statement of ?nancial position as which of the following?

A) $100,000
B) $103,400
C) $104,000
D) $104,500

Question 49

A $500,000 bond is retired at 97 when the carrying amount of the bond is $480,000. The entry to record the retirement would include a:

A) $20,000 loss.
B) $15,000 gain.
C) $5,000 loss.
D) $2,000 gain.

Question 50

If there is a loss on bonds redeemed early, it is

A) debited directly to Retained Earnings.
B) reported as "Other Expense" on the statement of earnings.
C) reported as part of earnings from operations on the statement of earnings.
D) debited to Interest Expense, as a cost of financing.

Question 51

Which of the following is a reason a company would prefer an operating lease over purchasing an asset?

A) The company's ability to borrow increases due to larger assets.
B) The company bene?ts from the increase in value of the assets.
C) The risk of loss from obsolescence is reduced.
D) The company does not have to depreciate the asset.

Question 52

A ten-year bond was issued in 20X4 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 20X6, the carrying value of the bond was less than the call price. The amount of bond liability removed from the accounts in 20X6 would be the

A) maturity value.
B) face amount plus unamortized discount.
C) call price.
D) carrying value.

Question 53

A $100,000 bond was retired at 96 when the carrying amount of the bond was $105,000. The entry to record the retirement would include a:

A) gain on bond redemption of $9,000.
B) loss on bond redemption of $4,000.
C) loss on bond redemption of $8,000.
D) gain on bond redemption of $4,000.

Question 54

A $100,000 bond was retired at 95 when the carrying amount of the bond was $103,000. The entry to record the retirement would include a:

A) gain on bond redemption of $8,000.
B) loss on bond redemption of $3,000.
C) loss on bond redemption of $8,000.
D) gain on bond redemption of $3,000.

Question 55

One thousand bonds with a face value of $1,000 each, are sold at 104. The entry to record the issue is
a)
$\begin{array} { l l r r } & \text { Cash } & 1,040,000 & \\ & \text { Bonds Payable } & & 1,000,000 \\& \text { Interest Payable } & & 40,000 \\\end{array}$
b)
$\begin{array} { l l r r } & \text { Cash } & &961,538 \\ & \text { Bonds Payable } &&& 961,538 \\\end{array}$
c )
$\begin{array} { l l r r } & \text { Cash } & & 1,040,000 \\ & \text { Bonds Payable } & &&1,040,000 \\\end{array}$
d)
$\begin{array} { l l r r } & \text { Cash } &1,000,000& \\ & \text { Interest Expense } & 40,000 & \\& \text { Bonds Payable } & & 1,040,000\\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 56

If a company makes extensive use of operating leases to ?nance assets, what is the effect on the debt-to-equity ratio?

A) The debt-to-equity ratio would not be affected.
B) The effect depends on whether the ratio is above 1 or not.
C) The debt-to-equity ratio would be overstated.
D) The debt-to-equity ratio would be understated.

Question 57

Which of the following criteria would indicate that a lease should be accounted for as a ?nance lease?

A) The present value of the minimum lease payments is $93,500, while the fair market value of the leased asset is $100,000.
B) The lease is for real property.
C) The lease asset is guaranteed to revert to the lessor at the end of the lease term.
D) The lease term is for four years, while the asset's useful life is ten years.

Question 58

A corporation issues $100,000, 10%, 5-year bonds on January 1, 20X4 for $108,111, at a price to yield 8%. Interest is paid semi-annually on January 1 and July 1. The amount of premium amortized on July 1, 20X4 is

A) $8,649
B) $5,000
C) $676
D) $4,324

Question 59

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

A) carrying amount of the bonds will decrease.
B) interest expense will remain unchanged.
C) carrying amount of the bonds will increase.
D) unamortized discount will increase.

Question 60

Alamo Airways purchase or leases its entire aircraft ?eet. Since Alamo already has too much debt, they would prefer off-balance-sheet ?nancing, which can be achieved using:

A) Finance leases
B) Operating leases
C) Bank debt
D) Convertible bonds

Question 61

Madison Co had the following activity during 20X7: $$\begin{array} { | l | r | } \hline \text { Face value of bond issuance } & \$ 200,000 \\\hline \text { Amortization of bond premium } & 2,000 \\\hline \text { Unamortized premium on bond issue } & 12,000 \\\hline \text { Payment of long-term note payable } & 45,000 \\\hline \text { Dividends paid to shareholders } & 25,000 \\\hline \text { Sale of shares } & 125,000 \\\hline \text { Gain on the sale of equipment } & 75,000 \\\hline\end{array}$$ What was the cash flow from financing activities?

A) $255,000
B) $267,000
C) $300,000
D) $269,000

Question 62

A company wants to maintain its current debt/equity ratio. Which of the following relationships would most likely occur on the cash ?ow statement?

A) Cash from operations would be equal to any debt paid off during the year.
B) New borrowings would replace any debt paid off.
C) New borrowings would be less than cash from operations for the year.
D) Cash from operations would be equal to cash from ?nancing activities for the year.

Question 63

Which of the following statements is true?

A) The corporation will have cash inflow when bonds are issued for an amount equal to, greater than, or less than the par value of the bonds.
B) The corporation will have to pay cash to bond investors when those investors demand to call the bonds.
C) The corporation will have an outflow of cash connected to an investing activity when interest is paid to bond investors.
D) An outflow of cash when convertible bonds are converted is a financing activity.

Question 64

In 20X6, General Dynamics (GD) had a Prepaid Pension Asset of $12.4 billion, total assets of $495 billion, and net income of $13.7 billion. This means that

A) GD's pension plan was underfunded by $12.4 billion.
B) GD recorded a nonrecurring item on the income statement for $12.4 billion.
C) GD's pension plan was overfunded by $12.4 billion.
D) GD had extraordinary liabilities of $12.4 billion.

Question 65

Which of the following is true?

A) An outflow of cash for interest payments is an investing activity.
B) An outflow of cash when convertible bonds are converted is an investing activity.
C) An outflow of cash when callable bonds are recalled by the issuer is a financing activity.
D) Payment of interest is an investing activity since we would not have interest unless we borrowed money or sold bonds to the public.

Question 66

On January 1, 20X7 Thesante Metals Ltd issued a $100,000, 6%, 5-year bond for $91,889 to yield 8%. Interest is payable semi-annually. The interest expense and interest payable for the first year are closest to:
$\begin{array} { lrr } & \text { Interest expense } & \text { Interest payable } \\\end{array}$
a) $\begin{array} { lrr } && \$ 3,675 &&&&& \$ 3,000 \\\end{array}$
b) $\begin{array} { lrr } && \$ 7351 &&&&& \$ 6,000 \\\end{array}$
c) $\begin{array} { lrr } && \$ 7,418 &&&& \$ 6,000 \\\end{array}$
d) $\begin{array} { lrr } && \$ 7,351 &&&& \$ 8,000 \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 67

Compared to using a ?nance lease, a lessee that makes use of an operating lease will most likely report higher:

A) Bank debt
B) Rent or lease expense
C) Current ratio
D) Cash ?ows from ?nancing activities

Question 68

Bullseye is a large retailer. Its debt-to-equity ratio last year was 0.82 and its interest-coverage ratio was 20.5. The industry averages for these two ratios are 0.68 and 24.59, respectively. Based on that information, which of the following statements is true?

A) Bullseye can pay its interest expense more easily than the average in the industry.
B) Bullseye is less risky than average for the industry.
C) Bullseye has more debt in its capital structure than the average for the industry.
D) Bullseye has less debt in its capital structure than the average for the industry.

Question 69

A creditor would most likely consider a decrease in which of the following ratios to be positive news?

A) Times interest earned
B) Current ratio
C) Debt to equity ratio
D) Inventory turnover

Question 70

What is the effect of classifying a lease as an operating lease, as opposed to as a finance lease, on the debt to equity ratio and the times-interest-earned ratio?
$\begin{array} { l l l } & \text { Debt to equity ratio } & \text { Times-interest-earned ratio } \\\end{array}$
a) $\begin{array} { l l l } && \text { Overstated } &&&&&& \text { Overstated } \\\end{array}$
b) $\begin{array} { l l l } && \text { Overstated } &&&&&& \text { Understated } \\\end{array}$
c) $\begin{array} { l l l } && \text { Understated } &&&&& \text { Overstated } \\\end{array}$
d) $\begin{array} { l l l } && \text { Understated } &&&&& \text { Understated } \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 71

A company uses a de?ned bene?t pension plan. At year-end, the pension obligation is $67.8 million and plan assets $56.9 million. This plan is:

A) Underfunded by $10.9 million.
B) Insolvent.
C) Committed to expend an additional $10.9 million.
D) Overfunded by $10.9 million.

Question 72

A company with a de?ned contribution pension plan is best described as being

A) committed to speci?c levels of contributions to the pension plan of the employee.
B) committed to making cash payments for pensions when the employee actually retires.
C) committed to speci?c retiree bene?t levels at retirement.
D) committed to early retirement for all employees.

Question 73

Which of the following ratios can be used to evaluate an entity's capital structure?

A) Current ratio
B) Debt-to-equity
C) Return-on-assets ratio
D) Times interest earned ratio

Question 74

On January 1, 20X6, Malenfant Ltd. sold ?ve year, 12% bonds with a face value of $500,000. Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for $538,500 to yield 10%. Using the effective interest method of amortization of bond discount or premium, interest expense for 20X6 is

A) $53,850
B) $50,000
C) $53,696
D) $60,000

Question 75

An accountant is reviewing the ?nancial statements of a company and notes that the company reports a pension liability on its balance sheet. What does the pension liability represent?

A) The increase in the pension obligation that was earned this year.
B) The present value of all future pension obligations.
C) The difference between the pension plan obligations and the pension plan assets.
D) The amount of this year's pension expense that has not been paid yet.

Question 76

Pleasant Company has established a pension plan for its employees that operates as follows: Each year, Pleasant Company places a ?xed dollar amount in a pension fund for each employee. The funds are then invested. Upon retirement, each employee is entitled to the cash value of the funds that have been invested in his/her name. This arrangement is an example of which of the following?

A) De?ned bene?t program.
B) De?ned contribution program.
C) Contingent program.
D) Deferred timing program.

Question 77

Milford Inc. has a debt-to-equity ratio of 0.80. It has total shareholders' equity of $2.5 million and current liabilities of $750,000. How much long-term debt is outstanding?

A) $3,125,000
B) $1,250,000
C) $2,375,000
D) $2,100,000

Question 78

In 20X4, The W D Co. had total liabilities of $22,704 million and total assets of $43,679 million. In 20X3, they had total liabilities of $21,990 million and total assets of $41,378 million. Calculate their debt to equity ratio for 20X4 and 20X3, respectively.

A) .48 and .47
B) .52 and .53
C) .92 and .88
D) 1.08 and 1.13

Question 79

A 6% five-year bond was issued at $918.89. The face value and yield to maturity for the bond are
$\begin{array} {crl} & \text { Face value } & \text { Yield to maturity } \\\end{array}$
a) $\begin{array} { l l l } & \$ 918.89 &&& \text { greater than } 6 \% . \\\end{array}$
b) $\begin{array} { l l l }& \$ 918.89 &&& \text { less than } 6 \% . \\\end{array}$
c) $\begin{array} { l l l } & \$ 1,000.00 && \text { greater than } 6 \% . \\\end{array}$
d) $\begin{array} { l l l } & \$ 1,000.00 && \text { less than } 6 \% . \\\end{array}$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 80

A financial analyst is evaluating the solvency and liquidity of Flagstaff Manufacturing and has collected the following data: $$\begin{array} { | l | r | r | r | } \hline & \underline { \mathbf { 2 0 X 7 } } & \underline { \mathbf { 2 0 X 6 } } & \underline { \mathbf { 2 0 X 5 } } \\\hline \text { Total debt } & \$ 2,000 & \$ 1,900 & \$ 1,750 \\\hline \text { Total equity } & \$ 4,000 & \$ 4,500 & \$ 5,000 \\\hline\end{array}$$ What would the analyst be most likely to conclude?

A) The company is becoming increasingly less solvent as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7.
B) The company is becoming increasingly less liquid as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7.
C) The company is becoming increasingly more solvent as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7.
D) The company is becoming increasingly more liquid as evidenced by the increase in its debt to equity ratio from 0.35 in 20X5 to 0.50 in 20X7.