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Accounting
Q:
The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n):
A. Debenture.
B. Bond indenture.
C. Mortgage.
D. Installment note.
E. Mortgage contract.
Q:
Bonds owned by investors whose names and addresses are recorded by the issuing company, and for which interest payments are made with checks or cash transfers to the bondholders, are called:
A. Callable bonds.
B. Serial bonds.
C. Registered bonds.
D. Coupon bonds.
E. Bearer bonds.
Q:
Bonds that have interest coupons attached to their certificates, which the bondholders detach during each interest period and present to a bank for collection, are called:
A. Coupon bonds.
B. Callable bonds.
C. Serial bonds.
D. Convertible bonds.
E. Registered bonds.
Q:
Secured bonds:
A. Are called debentures.
B. Have specific assets of the issuing company pledged as collateral.
C. Are backed by the issuer's bank.
D. Are subordinated to those of other unsecured liabilities.
E. Are the same as sinking fund bonds.
Q:
A bond traded at 102 means that:
A. The bond pays 2.5% interest.
B. The bond traded at $1,025 per $1,000 bond.
C. The market rate of interest is 2.5%.
D. The bonds were retired at $1,025 each.
E. The market rate of interest is 2 % above the contract rate.
Q:
Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as:
A. Convertible bonds.
B. Sinking fund bonds.
C. Callable bonds.
D. Serial bonds.
E. Junk bonds.
Q:
Sinking fund bonds:
A. Require the issuer to set aside assets to retire the bonds at maturity.
B. Require equal payments of both principal and interest over the life of the bond issue.
C. Decline in value over time.
D. Are registered bonds.
E. Are bearer bonds.
Q:
The equal total payments pattern for installment notes consists of changing amounts of interest but constant amounts of principal over the life of the note.
Q:
Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.
Q:
When convertible bonds are converted to a company's stock, the carrying value of the bonds is transferred to equity accounts and no gain or loss is recorded.
Q:
Two common ways of retiring bonds before maturity are to (1) exercise a call option or (2) purchase them on the open market.
Q:
The effective interest method yields increasing amounts of bond interest expense and decreasing amounts of premium amortization over the bond's life for bonds issued at a premium.
Q:
The issue price of bonds is found by computing the future value of the bond's cash payments, discounted at the market rate of interest.
Q:
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.
Q:
The market value or issue price of a bond is equal to the present value of all future cash payments provided by the bond.
Q:
On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of interest expense to be recorded on June 30 is $25,000.
Q:
On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $487,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The amount of discount amortized each period is $812.50.
Q:
The carrying (book) value of a bond payable is the par value of the bonds plus the discount.
Q:
The carrying (book) value of a bond at the time when it is issued is always equal to its par value.
Q:
A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.
Q:
When the contract rate is above the market rate, a bond sells at a discount.
Q:
When the contract rate on a bond issue is less than the market rate, the bonds will generally sell at a discount.
Q:
A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20 semiannual interest payments of $4,000 each.
Q:
Long-term bonds have relatively higher interest rates because they carry higher risk due to the longer time period.
Q:
The contract rate on previously issued bonds changes as the market rate of interest changes.
Q:
A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.
Q:
The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.
Q:
The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.
Q:
A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.
Q:
A lessee has substantially all of the benefits and risks of ownership in an operating lease.
Q:
A company's ability to issue unsecured debt depends on its credit standing.
Q:
Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.
Q:
Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.
Q:
The use of debt financing insures an increase in return on equity.
Q:
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.
Q:
Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.
Q:
An advantage of bond financing is that issuing bonds does not affect owner control.
Q:
A bond is a written promise to pay an amount identified as the par value of the bond along with interest.
Q:
A pension plan is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
Q:
Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.
Q:
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.
Q:
The present value of an annuity factor at 8% for 10 years is 6.7101. This implies that an annuity of ten $15,000 payments at 8% yields a present value of $2,235.
Q:
The present value of an annuity can be best or quickly computed as the sum of the individual future values for each payment.
Q:
An annuity is a series of equal payments at equal time intervals.
Q:
A company invests $10,000 at 7% compounded annually. At the end of the second year, the company should have $11,400 in the fund.
Q:
Compound interest means that interest in a second period is based on the total amount borrowed plus the interest accrued in the first period.
Q:
A basic present value concept is that cash paid or received in the future is worth more than the same amount of cash received today.
Q:
A basic present value concept is that cash paid or received in the future is worth less than the same amount of cash today.
Q:
Mortgage bonds are backed only by the good faith and credit of the issuing company.
Q:
Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrowers assets identified in the mortgage.
Q:
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.
Q:
Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.
Q:
Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.
Q:
An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.
Q:
A bond's par value is not necessarily the same as its market value.
Q:
Owners of coupon bonds are not required to pay tax on the interest earned.
Q:
Callable bonds reduce the bondholder's risk by requiring the issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds at maturity.
Q:
Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common stock.
Q:
Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.
Q:
Debentures always have specific assets of the issuing company pledged as collateral.
Q:
Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date.
Q:
The legal contract between the issuing corporation and the bondholders is called the bond indenture.
Q:
A corporation reported net income of $3,730,000 and paid preferred cash dividends of $100,000 during the current year. There were 600,000 weighted-average shares of common stock outstanding and the market price per common share was $88.33 at year-end. Calculate the company's price-earnings ratio.
Q:
A company reported $990,000 in net income for the current year. Total weighted-average number of common shares outstanding are 150,000 shares, and the year-end market price is $79.20 per common share. Calculate the company's price earnings ratio.
Q:
A company reported net income of $850,000 for the current year. The year-end market price per common share was $12 and there were 425,000 weighted-average shares of common stock outstanding. Calculate the company's price-earnings ratio.
Q:
A company's stock is selling for $67.20 per share and its earnings per share is $3.50 for the current year. Calculate the price-earnings ratio.
Q:
A corporation had current year net income of $2,375,000. It paid preferred dividends of $80,000 cash and had 500,000 weighted-average shares of common stock outstanding. Calculate the corporation's earnings per share.
Q:
Marble Corporation had the following balances in its stockholders' equity accounts at December 31, 2013: Common Stock, $10 par, 50,000 shares authorized,
20,000 shares issued .
$200,000 Paid-in Capital in Excess of Par Value, Common
250,000 Retained Earnings ..
500,000 Treasury Stock, 1,000 shares
(20,000) Total stockholders' equity ..
$930,000 The following transactions occurred during 2014: February 3
Sold and issued 3,000 shares of common stock for $22 per share. May 10
Declared a $0.50 per share dividend on common stock. October 12
Sold 500 shares of the treasury stock for $20 per share. December 31
Net income for the year was determined to be $75,000. Based on the above information, prepare a statement of stockholders' equity for 2014. Use the form below. Marble Corporation Statement of Stockholders Equity December 31, 2014 Common Stock
Paid-in Capital in Excess of Par Value, Common
Retained Earnings
Treasury Stock
Total Equity Balance, December 31, 2013
$200,000
$250,000
$500,000
$(20,000)
$930,000 Balance, December 31, 2014
Q:
Dawls Corporation reported stockholders' equity on December 31 of the prior year as follows: Common stock, $5 par value, 1,000,000 shares authorized, 500,000 shares issued.
$2,500,000 Paid-in capital in excess of par, common stock...
1,000,000 Retained earnings.
3,000,000 The following selected transactions occurred during the current year: Feb. 15
The board of directors declared a 5% stock dividend to stockholders of record on March 1, payable March 20. The stock was selling for $8 per share. Mar. 9
Distributed the stock dividend. May 1
A cash dividend of $0.30 per share was declared by the board of directors to stockholders of record on May 20, payable June 1. June 1
Paid the cash dividend. Aug. 20
The board decided to split the stock 4-for-1, effective on September 1. Sept. 1
Stock split 4-for-1. Dec. 31
Earned a net income of $800,000 for the current year. Prepare a statement of retained earnings as of December 31 of the current year.
Q:
Explain where each of the following items should appear in the financial statements of a corporation:
(1) The accounting department discovered that an entry was made last year to Prepaid Insurance instead of to Insurance Expense. The after-tax effect of the charge to Prepaid Insurance was $11,000.
(2) The company grants five of its employees the option to purchase 100 shares of its $5 par value common stock at its current market price of $20 per share anytime with the next five years. None of the employees exercised the options in the current year.
Q:
Given the following information about a corporation's current year activities, compute the retained earnings for the current year. Retained earnings, December 31 (prior year)
$250,000 Cost of goods sold
$90,000 Other operating expenses
$54,000 Cash dividends
$30,800 Correction of understatement of net income in prior period (inventory error)
$23,000 Stock dividends
$20,000 Net income
$36,000
Q:
A corporation received its charter and began business this year. The company is authorized to issue 50,000 shares of $100 par, 10%, noncumulative, nonparticipating preferred stock, and 500,000 shares of no-par common stock. The following selected transactions occurred during this year: Apr. 5
Issued 250 shares of preferred stock for $104 cash per share. June 15
Exchanged 750 shares of common stock for $15,000 in legal services incurred in the organization of the company. Prepare journal entries to record these transactions.
Q:
What is treasury stock? How is the purchase and sale of treasury stock recorded?
Q:
Explain the difference between a large stock dividend and a small stock dividend. In addition, explain how to record these two types of stock dividends.
Q:
What is a stock split? How is a stock split different from a stock dividend?
Q:
Explain how to compute book value per share and discuss how it can be used to analyze the financial condition of a corporation.
Q:
Explain how to compute dividend yield and discuss how it is used in analysis of a company's financial condition.
Q:
Explain how to calculate the price-earnings ratio and describe how it is used in analysis of a company's financial condition and performance.
Q:
What is a corporation? Identify the key advantages and disadvantages of corporations.
Q:
A company declared a $0.55 per share cash dividend. The company has 200,000 shares authorized, 190,000 shares issued, and 8,000 shares in treasury stock. The journal entry to record the payment of the dividend is:
A. Debit Retained Earnings $104,500; credit Common Dividends Payable $104,500.
B. Debit Common Dividends Payable $104,500; credit Cash $104,500.
C. Debit Retained Earnings $100,100; credit Common Dividends Payable $100,100.
D. Debit Common Dividends Payable $100,100; credit Cash $100,100.
E. Debit Retained Earnings $110,000; credit Common Dividends Payable $110,000.