Question 1

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 shown on a company's balance sheet, such as leasing arrangements. Bonds, mortgages, and pensions are typically reflected on a company's balance sheet.

Question 2

Which of the following statements is not true about trading on the equity?

Accepted Answer

Trading on the equity refers to the use of fixed-interest bearing debt (such as bonds) and preferred stock to increase the returns to the common shareholders. It does not involve increasing the number of shares of stock owned; rather, it involves increasing the corporation's debt to leverage the equity investment.

Question 3

Which of the following qualifies as a capital lease?

Accepted Answer

A capital lease is a lease of a fixed asset that transfers substantially all the rights and obligations of ownership from the lessor to the lessee. In this case, a seven-year lease on a machine that has a seven-year useful life is considered a capital lease as it transfers ownership rights substantially to the lessee. The other choices do not meet the criteria for a capital lease.

Question 4

Under a defined benefit pension plan,

Accepted Answer

Under a defined benefit pension plan, the employer guarantees the employees certain benefits upon retirement. This means that the employer is responsible for ensuring that there is enough money in the pension fund to pay out the promised benefits. Actuarial computations are necessary to determine the amount of money needed to fund the plan, and accounting for annual pension expense can be complex as it involves estimating future benefit payments and discounting them to their present value. Retirement payments are not based on the amount accumulated in the pension fund, as is the case with a defined contribution plan.

Question 5

Adair Corporation purchased a building on January 2 by signing a long-term $1,200,000 mortgage with monthly payments of $11,000.The mortgage carries an interest rate of 10 percent.The entry to record the mortgage will include a

Accepted Answer

The entry to record the mortgage would be a debit to the Building account for the purchase price of $1,200,000, and a credit to the Mortgage Payable account for the same amount, reflecting the long-term liability. Since the company is not paying cash for the building, there would be no entry to the Cash account at this time. Option D correctly reflects these entries.

Question 6

The advantages of financial leverage accrue primarily to

Accepted Answer

Financial leverage refers to the use of debt to finance a company's operations or investments. The use of debt increases the company's financial risk but also has the potential to increase returns for the stockholders. This is because the cost of debt is typically lower than the cost of equity, so using debt to finance operations can increase profits and earnings per share, leading to higher stock prices and dividends. Bondholders and lenders do not usually benefit from financial leverage in the same way that stockholders do.

Question 7

Interest coverage ratio is a measure of

Accepted Answer

The interest coverage ratio measures a company's ability to pay interest on its debt, indicating protection from default on interest payments.

Question 8

All of the following are advantages of issuing bonds rather than stock except

Accepted Answer

This statement is incorrect. Payment of bond interest is required, whereas payment of dividends to stockholders is not required.

Question 9

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

Accepted Answer

Under a capital lease, the lessee records the leased asset and the corresponding lease obligation as a liability on their balance sheet, and also records depreciation on the leased asset as an expense. However, they do not record rent expense as the leased asset is viewed as their own asset and not a rental expense.

Question 10

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

Accepted Answer

The interest coverage ratio is calculated by dividing income before income taxes plus interest expense by interest expense. This measures a company's ability to meet its interest obligations.

Question 11

Under an operating lease,the lessee

Accepted Answer

Under an operating lease, the lessee is not required to record the leased asset as a capitalized asset on their balance sheet. Instead, they should record the lease payments as rent expense. Therefore, the correct answer is to debit Rent Expense.

Question 12

A company with income before income taxes of $192,000,and $40,000 in interest expense,has an interest coverage ratio of

Accepted Answer

Interest coverage ratio = Income before income taxes / Interest expense= $192,000 / $40,000= 4.8 times

Question 13

Adair Corporation purchased a building on January 2 by signing a long-term $1,200,000 mortgage with monthly payments of $11,000.The mortgage carries an interest rate of 10 percent.The amount owed on the mortgage at the end of the first month will be

Accepted Answer

The answer of Adair Corporation purchased a building on January...

Question 14

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

Accepted Answer

In a typical mortgage structure, the total payment amount remains constant over time, but the composition of the payment shifts. At the beginning, interest constitutes a larger portion of the payment, but as the principal balance decreases over time, the interest expense decreases and the portion of the payment applied to the principal increases.

Question 15

Which of the following is not descriptive of a defined benefit plan?

Accepted Answer

Defined benefit plans require actuarial calculations to determine the pension expense account, provide guaranteed benefits to employees upon retirement, and base contributions on estimated future benefits. However, the accounting for annual pension expense can be complex due to the actuarial calculations involved.

Question 16

All of the following are operating leases except a

Accepted Answer

A lease with an option to buy for a small amount at the end of the lease is considered a finance lease, not an operating lease. The other options all have characteristics of an operating lease.

Question 17

Other postretirement benefits should be expensed

Accepted Answer

Other postretirement benefits (OPB) are benefits provided to employees after their retirement, such as healthcare, life insurance, and pension plans. These benefits are earned by employees based on their years of service and other qualifying factors, so they should be expensed as the employee earns them, which is typically over a long period of time. Therefore, option D - as the employee earns them - is the best choice.

Question 18

Which of the following is not an advantage of issuing long-term debt?

Accepted Answer

Issuing long-term debt increases a company's financial leverage, which can increase the risk of bankruptcy if the company is unable to meet its debt obligations. Choices A, B, and D are generally considered advantages of issuing long-term debt.

Question 19

A deferred income tax liability arises when

Accepted Answer

A deferred income tax liability arises when there is a difference between financial reporting requirements and income tax filing requirements. This leads to temporary differences in the recognition of revenue or expenses, resulting in either deferred tax assets or liabilities. An expense not being deductible for tax purposes would lead to a deferred tax asset rather than a liability.

Question 20

Adair Corporation purchased a building on January 2 by signing a long-term $1,200,000 mortgage with monthly payments of $11,000.The mortgage carries an interest rate of 10 percent.The entry to record the first monthly payment will be:

Accepted Answer

The first monthly interest is calculated as $1,200,000 * (10% / 12) = $10,000. The payment reduces the principal by $1,000 ($11,000 - $10,000 interest).

Quiz 11: Long-Term Liabilities