Question 1

An advantage of bond financing is that issuing bonds does not affect owner control.

Accepted Answer

Bond financing involves borrowing funds from bondholders and paying them interest, but it does not involve giving up ownership or control of the business like equity financing. As a result, the answer is true - issuing bonds does not affect owner control.

Question 2

A basic present value concept is that cash in the future is worth less than the same amount of cash today.

Accepted Answer

This is because of the concept of time value of money, which recognizes that money today can be invested to earn interest or returns, making it more valuable than the same amount of money in the future. Additionally, there is a level of uncertainty associated with receiving money in the future, which further reduces its present value.

Question 3

The type of bond that provides the greatest security from theft of loss is the debenture.

Accepted Answer

Debentures are unsecured bonds, meaning they are not backed by specific assets. This makes them more risky than secured bonds, such as mortgage bonds, which are backed by specific properties. Therefore, debentures do not provide the greatest security against theft or loss.

Question 4

If a bond's interest period does not coincide with the issuing company's accounting period,an adjusting entry is necessary to recognize bond interest expense accruing since the most recent interest payment.

Accepted Answer

This statement is true. Adjusting entries are necessary to ensure that financial statements accurately reflect the transactions and events of a business. If a bond's interest period does not coincide with the company's accounting period, an adjusting entry is needed to recognize the accrued interest expense.

Question 5

Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.

Accepted Answer

This is correct. The interest payments on bonds are calculated by multiplying the par value (face value) of the bond by the stated contract rate (also known as the coupon rate).

Question 6

Operating leases are long-term or noncancelable leases in which the lessor transfers all the risks and rewards of ownership to the lessee.

Accepted Answer

Operating leases are long-term leases where the lessor retains significant risks and benefits of ownership, unlike finance leases where the risks and benefits are transferred to the lessee.

Question 7

A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to use the asset for a period of time in return for cash payment(s) to the lessor.

Accepted Answer

The statement accurately describes what a lease is.

Question 8

If the borrower fails to pay a mortgage,most mortgage contracts grant the lender the right to foreclose on the property that is identified as security in the contract.

Accepted Answer

This is a standard term in most mortgage contracts, giving the lender the right to foreclose on the property in case of default by the borrower.

Question 9

A common payment pattern for installment notes is to pay the accrued interest periodically and to pay the principle amount on the maturity date.

Accepted Answer

The answer of A common payment pattern for installment notes...

Question 10

An annuity is a series of equal payments made at equal time intervals.

Accepted Answer

This is the correct definition of an annuity.

Question 11

The carrying value of a long-term note is computed as the present value of all remaining future payments,discounted using the market rate at the time of issuance.

Accepted Answer

This statement is true. The carrying value of a long-term note is based on the present value of all remaining future payments using the market rate at the time of issuance.

Question 12

An advantage of bonds is that interest does not have to be paid.

Accepted Answer

Bonds do require interest payments to be made to bondholders.

Question 13

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

Accepted Answer

The answer of Bonds and long-term notes are similar in...

Question 14

Bonds may only be issued on an interest payment date.

Accepted Answer

Bonds can be issued on any date, not just on an interest payment date. However, the first interest payment will only be made on the next interest payment date.

Question 15

The present value of an annuity can be computed as the sum of the individual future values for each payment.

Accepted Answer

The present value of an annuity is computed as the sum of the discounted present values of each payment.

Question 16

A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.

Accepted Answer

This statement is true.

Question 17

An installment note is an obligation to the issuing company that requires a series of periodic payments to the holder.

Accepted Answer

An installment note is a type of loan agreement where the borrower agrees to make periodic payments to the lender until the full amount of the loan, plus interest, has been repaid.

Question 18

Return on equity increases when the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets.

Accepted Answer

Return on equity (ROE) is the measure of profitability for the shareholders, which is calculated as net income divided by shareholders' equity. If the expected rate of return from the acquired assets is higher than the interest rate on the debt issued to finance the acquired assets, then the earnings from the acquisition will be higher than the cost of borrowing. This effectively amplifies the company's earnings and hence the ROE increases.

Question 19

The present value of an annuity factor for six years at 10% is 4.3553.This means that the present value of an annuity of six annual $2,000 payments at 10% would equal $8,711.

Accepted Answer

To calculate the present value of an annuity, we multiply the periodic payment (in this case, $2,000) by the annuity factor (in this case, 4.3553).

So, PV = $2,000 x 4.3553 = $8,710.60, which rounds to $8,711. Thus, the statement is true.

Question 20

A basic present value concept is that cash received in the future is worth more value than the same amount of cash received today.

Accepted Answer

The basic present value concept is actually the opposite - cash received today is worth more than the same amount of cash received in the future. This is due to the time value of money and the potential for the money to earn interest or a return if invested.

Quiz 10: Reporting and Analyzing Long-Term Liabilities