Question 1

A bond listed at 103 on a stock exchange is selling at 103% of its par value.

Accepted Answer

When a bond is listed at a price greater than 100, it means it is selling for more than its par value. In this case, the bond is selling at 103% of its par value, so it is listed at 103. Therefore, the statement is true.

Question 2

The payment pattern for installment notes that consists of accrued interest plus equal amounts of principal yields cash flows of equal amounts over the life of the note.

Accepted Answer

In an installment note, the principal portion of the payment increases over time while the interest portion decreases, resulting in varying cash flow amounts.

Question 3

The debt to equity ratio is calculated by dividing total company's liabilities by the company's total assets.

Accepted Answer

The debt to equity ratio is calculated by dividing total company's liabilities by the company's shareholder's equity.

Question 4

A bond's par value is not necessarily the same as its market value.

Accepted Answer

The par value of a bond is the face value that appears on the bond certificate and represents the amount that the bond will be worth at maturity. However, the market value of a bond can fluctuate based on various factors such as changes in interest rates and the creditworthiness of the issuer. As a result, the market value of a bond can be higher or lower than its par value.

Question 5

The effective interest method yields increasing amounts of bond interest expense and decreasing amount of premium amortization over the life of the bond .

Accepted Answer

The answer of The effective interest method yields increasing amounts...

Question 6

The carrying value of a long-term note payable:

Accepted Answer

The carrying value of a long-term note payable is the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance. This represents the amount that needs to be paid in order to retire the obligation. The carrying value will be adjusted periodically to reflect amortization of any discount or premium on the note.

Question 7

Premium on Bonds Payable is an increase to the liability account.

Accepted Answer

Premium on Bonds Payable represents the excess amount paid by investors above the face value of the bond. It is recorded as a liability and increases the total amount owed to bondholders.

Question 8

The debt to equity ratio helps assess the risks of a company's financing structure.

Accepted Answer

The debt to equity ratio indicates the proportion of debt and equity financing used by a company, which is an important factor in assessing the company's financial risk. A high debt to equity ratio suggests that a company has a higher level of financial leverage, which can increase financial risk if the company is unable to meet its debt obligations.

Question 9

Installment notes payable that require periodic payments of accrued interest plus equal amounts of principal result in:

Accepted Answer

When installment notes payable require periodic payments of accrued interest plus equal amounts of principal, the periodic total payments gradually decrease in amount. This is because as the amount of principal owed decreases with each payment, the interest charged on that smaller principal balance also decreases. Therefore, the total amount of each periodic payment (including both principal and interest) also decreases.

Question 10

To provide security to creditors and to reduce interest costs,bonds and notes payable can be secured by:

Accepted Answer

Mortgages provide security to creditors as it involves the borrower pledging specific assets (such as property) as collateral that can be seized and sold by the creditor if the borrower defaults on the loan. This ensures that the creditor will have a way to recover their investment, and therefore reduces the interest costs for the borrower. Safe deposit boxes, equity, and debentures do not provide the same level of security for creditors. The FASB (Financial Accounting Standards Board) is a regulatory body that establishes accounting standards and does not relate to the security of bonds and notes payable.

Question 11

Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

Accepted Answer

This statement is true. The issuer of a bond may choose to exercise a call option, which allows them to retire the bonds before maturity. Alternatively, they may choose to purchase the bonds on the open market.

Question 12

GAAP criteria for identifying a lease as a capital lease are more general than the criteria under IFRS.

Accepted Answer

The answer of GAAP criteria for identifying a lease as...

Question 13

A company borrowed $300,000 cash from the bank by signing a 5-year,8% installment note.The present value factor for an annuity at 8% for 5 years is 3.9927.Each annuity payment equals $75,137.The present value of the note is:

Accepted Answer

$75,137 x 3.9927 = $300,000

Question 14

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Accepted Answer

A premium on bonds occurs when the contract rate of the bonds is higher than the market rate, resulting in investors paying more than the face value of the bond in order to receive the higher interest payments.

Question 15

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Accepted Answer

Callable bonds have a call option that allows the issuer to retire them at a stated dollar amount before the maturity date.

Question 16

A company borrowed $50,000 cash from the bank and signed a 6-year note at 7%.The present value factor for an annuity for 6 years at 7% is 4.7665.The annual annuity payments equal $10,490.The present value of the loan is:

Accepted Answer

$10,490 x 4.7665 = $50,000

Question 17

Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:

Accepted Answer

Installment notes require the issuer to make a series of payments consisting of both interest and principal. Debentures are unsecured bonds that only pay interest. Discounted notes have a lower face value than their redemption value. Indentures are legal agreements between a bond issuer and bondholder. Investment notes is not a financial term.

Question 18

A company must repay the bank $10,000 cash in 3 years for a loan.The loan agreement specifies 8% interest compounded annually.The present value factor for 3 years at 8% is 0.7938.The present value of the loan is:

Accepted Answer

$10,000 x 0.7938 = $7,938

Question 19

A company with liabilities of $2,816,000 and equity of $826,000 has a debt to equity ratio equal to 29.33%

Accepted Answer

$2,816/$826 = 3.41

Question 20

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Accepted Answer

A discount on bonds payable occurs when the issue price of bonds is less than their par value. This means that the bonds are sold at a price below their face value, resulting in a discount for the buyers. The discount is accounted for as interest expense over the life of the bonds.

Quiz 10: Reporting and Analyzing Long-Term Liabilities