Question 1

The higher the debt-to-equity ratio the greater the positive financial leverage.

Accepted Answer

A higher debt-to-equity ratio indicates that a company is financing a larger portion of its operations through debt, which can increase financial risk if the company is unable to meet its debt obligations. Positive financial leverage occurs when borrowed funds generate a return greater than the cost of borrowing, but a higher debt-to-equity ratio does not inherently guarantee greater positive financial leverage.

Question 2

Gary's Gadgets prepared the following preliminary balance sheet a few days before its December 31 yearend:

a.Use the preliminary balance sheet to calculate the debt-to-equity ratio.
b.Gary thinks that investors will be more interested in his company if it has very few liabilities.He plans to pay $2,000 of the accounts payable before December 31.What will the new debt-to-equity ratio be after the payment has been made?
c.Is it ethical to make last-minute payments to improve the appearance of the balance sheet?
d.Is it true that investors prefer companies with very little debt? Explain positive financial leverage.

Accepted Answer

The answer of Gary's Gadgets prepared the following preliminary balance...

Question 3

The risk associated with debt is risk to ________.

Accepted Answer

The answer of The risk associated with debt is risk...

Question 4

Team instructions: Provide students with copies of real merchandising companies' annual reports,or give students the Web addresses of real merchandising companies and ask them to print out the annual reports.
Divide the class into teams of three or four people.All team members should work with the same company's annual report.Give the students time in class to answer the following questions for their company.Each team should turn in only one copy of the answers for grading,along with a copy of the annual report that they used.All team members will receive the same grade.

Accepted Answer

The answer of Team instructions: Provide students with copies of...

Question 5

Buzz Corporation issued $50,000 worth of 10-year,8% bonds for $48,359.66.The $48,359.66 is the ________.

Accepted Answer

The $48,359.66 is the present value, which is the amount the bonds are worth now, discounted back from their future value.

Question 6

The primary risk associated with long-term debt is the risk of not being able to make the debt payments.

Accepted Answer

Long-term debt typically involves a series of regular payments over an extended period of time. If a company is unable to make these payments, it risks defaulting on the debt, which can lead to severe financial consequences such as bankruptcy or the loss of assets. Therefore, the primary risk associated with long-term debt is the risk of not being able to make the required payments.

Question 7

Berry Rich,Inc.had $600,000 in total assets,of which $200,000 are current assets,and $200,000 in shareholders' equity,of which $80,000 is contributed capital.Calculate the debt-to-equity ratio.Round your answer to the nearest whole percent.

Accepted Answer

The answer of Berry Rich,Inc.had $600,000 in total assets,of which...

Question 8

On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.On its balance sheet at December 31,2011,Alpha will show bonds payable of $1,000,000 ________.

Accepted Answer

Since the market rate of interest (6%) was higher than the coupon rate (5%), the bonds would have been issued at a discount. Therefore, on the balance sheet, the bonds payable will be shown minus the unamortized discount.

Question 9

Off-balance-sheet financing is always illegal.

Accepted Answer

Off-balance-sheet financing is not always illegal. However, it can be risky and unethical if used to mask the true financial situation of a company. The legality of off-balance-sheet financing depends on the accounting standards and regulations of a particular country.

Question 10

Z Biz sold a 5-year,$1,000,zero-interest bond for $497.18 when the market rate of interest was 15%.The present value of the principal is ________.

Accepted Answer

The present value of the principal of a zero-interest bond is the price at which it was sold, which is $497.18 in this case, because the bond pays no interest and its value is solely based on the discounted value of its face value at maturity.

Question 11

Stanton Corporation sold a 10-year,$1,000,zero-interest bond when the market rate of interest was 7%.The present value of the principal is ________.

Accepted Answer

To find the present value of the bond, we need to use the present value formula:

Present Value = Face Value / (1 + Market Interest Rate)^Number of Periods

In this case, the face value is $1,000, the market interest rate is 7%, and the number of periods is 10. Plugging those values into the formula, we get:

Present Value = $1,000 / (1 + 0.07)^10
Present Value = $1,000 / 1.96715
Present Value = $508.35

Therefore, the present value of the principal is $508.35, which is the closest choice to our calculation.

Question 12

Companies should always maximize its debt-to-equity ratio.

Accepted Answer

Maximizing debt-to-equity ratio can increase a company's financial risk and make it difficult for the company to borrow additional funds in the future. A balanced debt-to-equity ratio is more desirable.

Question 13

Which of following is NOT a step that should be taken to minimize risk associated with long-term debt? A company should ________.

Accepted Answer

Maximizing its debt-to-equity ratio would increase the risk associated with long-term debt, so it is not a step that should be taken to minimize risk. The other three steps listed would help to minimize risk by ensuring that the company has the ability to meet its debt obligations and that the cost of borrowing is reasonable given the company's financial situation.

Question 14

On January 1,2011,Zenith,Inc.signed a $200,000,5%,20-year mortgage note to buy a new office building.The mortgage will be repaid in a series of twenty equal annual installment payments.Calculate the amount of each payment.Round your answer to the nearest dollar.

Accepted Answer

The answer of On January 1,2011,Zenith,Inc.signed a $200,000,5%,20-year mortgage note...

Question 15

On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.How much cash will bondholders receive on December 31,2011,the first interest payment date?

Accepted Answer

The answer of On January 1,2011,Alpha Company issued $1,000,000 of...

Question 16

On January 1,2011,Nadir Company issued $1,000,000 of 6%,20-year bonds when the market rate of interest was 5%.The bonds pay interest annually on December 31.How much cash did Nadir receive when the bonds were sold?

Accepted Answer

The answer of On January 1,2011,Nadir Company issued $1,000,000 of...

Question 17

On January 1,2011,Bondz,Inc.issued $1,000,000 of 10%,10-year bonds when the market rate of interest was 12%.The bonds pay interest QUARTERLY.To calculate the amount of cash that Bondz received,you must use a discount rate of ________.

Accepted Answer

The answer of On January 1,2011,Bondz,Inc.issued $1,000,000 of 10%,10-year bonds...

Question 18

On January 1,2011,Nadir Company issued $1,000,000 of 6%,20-year bonds when the market rate of interest was 5%.The bonds pay interest annually on December 31.To calculate the amount of cash that Nadir received,you must find ________.

Accepted Answer

The answer of On January 1,2011,Nadir Company issued $1,000,000 of...

Question 19

On January 1,2011,Alpha Enterprise signed a $100,000,6%,20-year mortgage note to buy a new warehouse.The mortgage will be repaid in a series of twenty equal annual installment payments.Calculate the amount of each payment.Round your answer to the nearest dollar.

Accepted Answer

The answer of On January 1,2011,Alpha Enterprise signed a $100,000,6%,20-year...

Question 20

On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.To calculate the amount of cash that Alpha received,you must use a discount rate of ________.

Accepted Answer

The answer of On January 1,2011,Alpha Company issued $1,000,000 of...

Quiz 7: Accounting for Liabilities

The higher the debt-to-equity ratio the greater the positive financial leverage.

The risk associated with debt is risk to ________.

Buzz Corporation issued $50,000 worth of 10-year,8% bonds for $48,359.66.The $48,359.66 is the ________.

The primary risk associated with long-term debt is the risk of not being able to make the debt payments.

Berry Rich,Inc.had $600,000 in total assets,of which $200,000 are current assets,and $200,000 in shareholders' equity,of which $80,000 is contributed capital.Calculate the debt-to-equity ratio.Round your answer to the nearest whole percent.

On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.On its balance sheet at December 31,2011,Alpha will show bonds payable of $1,000,000 ________.

Off-balance-sheet financing is always illegal.

Z Biz sold a 5-year,$1,000,zero-interest bond for $497.18 when the market rate of interest was 15%.The present value of the principal is ________.

Stanton Corporation sold a 10-year,$1,000,zero-interest bond when the market rate of interest was 7%.The present value of the principal is ________.

Companies should always maximize its debt-to-equity ratio.

Which of following is NOT a step that should be taken to minimize risk associated with long-term debt? A company should ________.

On January 1,2011,Zenith,Inc.signed a $200,000,5%,20-year mortgage note to buy a new office building.The mortgage will be repaid in a series of twenty equal annual installment payments.Calculate the amount of each payment.Round your answer to the nearest dollar.

On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.How much cash will bondholders receive on December 31,2011,the first interest payment date?

On January 1,2011,Nadir Company issued $1,000,000 of 6%,20-year bonds when the market rate of interest was 5%.The bonds pay interest annually on December 31.How much cash did Nadir receive when the bonds were sold?

On January 1,2011,Bondz,Inc.issued $1,000,000 of 10%,10-year bonds when the market rate of interest was 12%.The bonds pay interest QUARTERLY.To calculate the amount of cash that Bondz received,you must use a discount rate of ________.

On January 1,2011,Nadir Company issued $1,000,000 of 6%,20-year bonds when the market rate of interest was 5%.The bonds pay interest annually on December 31.To calculate the amount of cash that Nadir received,you must find ________.

On January 1,2011,Alpha Enterprise signed a $100,000,6%,20-year mortgage note to buy a new warehouse.The mortgage will be repaid in a series of twenty equal annual installment payments.Calculate the amount of each payment.Round your answer to the nearest dollar.

On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.To calculate the amount of cash that Alpha received,you must use a discount rate of ________.