Question 1

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 2

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 investors are willing to pay more than the face value of the bond because the bond's contract rate is higher than the current market rate. This results in a higher effective interest rate for the investor.

Question 3

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

Accepted Answer

This statement is false. The GAAP and IFRS criteria for identifying a lease as a capital lease are actually very similar, with both requiring an evaluation of whether the lease transfers substantially all of the risks and rewards of ownership to the lessee, among other factors.

Question 4

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 5

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 a bond is less than its par value. This is because investors are willing to pay less for the bond if the interest rate they will receive is lower than the market rate. The difference between the issue price and par value is recorded as a discount on bonds payable on the balance sheet.

Question 6

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

Accepted Answer

The debt to equity ratio measures the proportion of debt and equity financing used by a company, and can help to evaluate the company's financial leverage and potential risks associated with its financing structure.

Question 7

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

The answer of The payment pattern for installment notes that...

Question 8

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 the company owes currently to its creditors, and is typically reported on the balance sheet as a liability. The future value of all remaining future payments is not used to compute the carrying value, and the face value less total future interest payments is not an accurate representation of the current amount owed since it does not account for the time value of money. Additionally, the present value of remaining interest payments would not include the principal amount owed, and the discount on the note amortization would only reduce the carrying value over time, but it does not directly calculate it.

Question 9

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

Accepted Answer

Premium on Bonds Payable represents the excess amount paid by investors for a bond issuance and is added to the bond's face value to arrive at the total bond proceeds. It is recorded as a liability on the balance sheet and increases the Bonds Payable account.

Question 10

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 11

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 equity.

Question 12

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 13

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

The debt to equity ratio is calculated by dividing total liabilities by total equity. In this case, $2,816,000 / $826,000 = 3.41, not 29.33%.

Question 14

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

Accepted Answer

Bonds listed above 100 are typically listed as a percentage of their par value, with 100 representing par value and any percentage above 100 indicating a premium. Therefore, a bond listed at 103 is selling at 103% of its par value.

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 give the issuer the option to retire them at a stated dollar amount prior to maturity, hence the statement is true.

Question 16

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

We can use the formula for present value of a loan:

PV = FV / (1+r)^n

Where PV is the present value, FV is the future value (which is $10,000), r is the annual interest rate as a decimal (0.08), and n is the number of years.

Plugging in the values, we get:

PV = 10,000 / (1+0.08)^3
PV = 10,000 / 1.259712
PV = 7,938.46

Therefore, the present value of the loan is $7,938.46, which corresponds to choice C.

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, discounted notes do not consist of both interest and principal payments, indentures are legal contracts related to bond issues, and investment notes is not a commonly recognized term.

Question 18

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

Accepted Answer

Bonds and notes can be secured by a mortgage on specific assets of the issuer, which provides some assurance to creditors that they will be repaid even if the issuer defaults on the debt obligation. This, in turn, can reduce the interest rate that the issuer must pay to attract investors.

Question 19

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

Accepted Answer

A bond's par value is the amount that will be paid back to the bondholder at maturity, while its market value is determined by the supply and demand in the market and can fluctuate above or below the par value.

Question 20

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

Call options and open market purchases are two common ways of retiring bonds before maturity.

Quiz 10: Long-Term Liabilities