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Q:
A company may retire bonds by:
A. Exercising a call option.
B. The holders converting them to stock.
C. Purchasing the bonds on the open market.
D. Paying them off at maturity.
E. All of the choices are correct.
Q:
A company issues at par 9% bonds with a par value of $100,000 on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash received on July 1 by the bond holder(s) is:
A. $1,500.
B. $3,000.
C. $4,500.
D. $6,000.
E. $7,500.
Q:
A company issues at par 9% bonds with a par value of $100,000 on April 1, which is 4 months after the most recent interest date. The cash received for accrued interest on April 1 by the bond issuer is:
A. $ 750.
B. $5,250.
C. $1,500.
D. $3,000.
E. $6,000.
Q:
If an issuer sells bonds at a date other than an interest payment date:
A. This means the bonds sell at a premium.
B. This means the bonds sell at a discount.
C. The issuing company will report a loss on the sale of the bonds.
D. The issuing company will report a gain on the sale of the bonds.
E. The buyers normally pay the issuer the purchase price plus any interest accrued since the prior interest payment date.
Q:
A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a:
A. Credit to Interest Income.
B. Credit to Premium on Bonds Payable.
C. Credit to Discount on Bonds Payable.
D. Debit to Premium on Bonds Payable.
E. Debit to Discount on Bonds Payable.
Q:
Adidas issued 10-year, 8% bonds with a par value of $200,000. Interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is true?
A. Adidas must pay $200,000 at maturity and no interest payments.
B. Adidas must pay $206,948 at maturity and no interest payments.
C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each.
D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each.
E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.
Q:
The Premium on Bonds Payable account is a(n):
A. Revenue account.
B. Adjunct or accretion liability account.
C. Contra revenue account.
D. Contra asset account.
E. Contra liability account.
Q:
The market value of a bond is equal to:
A. The present value of all future cash payments provided by a bond.
B. The present value of all future interest payments provided by a bond.
C. The present value of the principal for an interest-bearing bond.
D. The future value of all future cash payments provided by a bond.
E. The future value of all future interest payments provided by a bond.
Q:
The effective interest amortization method:
A. Allocates bond interest expense over the bonds life using a changing interest rate.
B. Allocates bond interest expense over the bonds life using a constant interest rate.
C. Allocates a decreasing amount of interest over the life of a discounted bond.
D. Allocates bond interest expense using the current market rate for each interest period.
E. Is not allowed by the FASB.
Q:
A discount on bonds payable:
A. Occurs when a company issues bonds with a contract rate less than the market rate.
B. Occurs when a company issues bonds with a contract rate more than the market rate.
C. Increases the Bond Payable account.
D. Decreases the total bond interest expense.
E. Is not allowed in many states to protect creditors.
Q:
The Discount on Bonds Payable account is:
A. A liability.
B. A contra liability.
C. An expense.
D. A contra expense.
E. A contra equity.
Q:
Amortizing a bond discount:
A. Allocates a portion of the total discount to interest expense each interest period.
B. Increases the market value of the Bonds Payable.
C. Decreases the Bonds Payable account.
D. Decreases interest expense each period.
E. Increases cash flows from the bond.
Q:
On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $10,000 every six months. The life of these bonds is:
A. 15 years.
B. 30 years.
C. 26.5 years.
D. 32 years
E. 35 years.
Q:
On January 1 of Year 1, Drum Line Airways issued $3,500,000 of par value bonds for $3,200,000. The bonds pay interest semiannually on January 1 and July 1. The contract rate of interest is 7% while the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized at a rate of $10,000 every six months.
The amount of interest expense recognized by Drum Line Airways on the bond issue in Year 1 would be:
A. $132,500.
B. $225,000.
C. $265,000.
D. $245,000.
E. $280,000.
Q:
A bond sells at a discount when the:
A. Contract rate is above the market rate.
B. Contract rate is equal to the market rate.
C. Contract rate is below the market rate.
D. Bond has a short-term life.
E. Bond pays interest only once a year.
Q:
When a bond sells at a premium:
A. The contract rate is above the market rate.
B. The contract rate is equal to the market rate.
C. The contract rate is below the market rate.
D. It means that the bond is a zero coupon bond.
E. The bond pays no interest.
Q:
Bonds can be issued:
A. At par.
B. At a premium.
C. At a discount.
D. Between interest payment dates.
E. All of the choices are correct.
Q:
Tart Company's most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?
A. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
B. Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
C. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
D. Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
E. Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchanged.
Q:
Pitt Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?
A. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
B. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
C. Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
D. Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
E. Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.
Q:
The debt-to-equity ratio:
A. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B. Is a means of assessing the risk of a company's financing structure.
C. Is not relevant to secured creditors.
D. Can always be calculated from information provided in a company's income statement.
E. Must be calculated from the market values of assets and liabilities.
Q:
Which of the following accurately describes a debenture?
A. A legal contract between the bond issuer and the bondholders.
B. A type of bond issued in the names and addresses of the bondholders.
C. A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds.
D. A type of bond which is not collateralized but backed only by the issuer's general credit standing.
E. A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common stock.
Q:
The party that has the right to exercise the call option on callable bonds is(are):
A. The bondholders.
B. The bond issuer.
C. The bond indenture.
D. The bond trustee.
E. The bond underwriter.
Q:
Collateral agreements for a note or bond can:
A. Lower the risk in comparison with unsecured debt.
B. Increase the risk in comparison with unsecured debt.
C. Have no effect on risk.
D. Reduce the issuer's assets.
E. Increase total cost for the borrower.
Q:
A bondholder that owns a $1,000, 10%, 10-year bond has:
A. Ownership rights in the issuing company.
B. The right to receive $10 per year until maturity.
C. The right to receive $1,000 at maturity.
D. The right to receive $10,000 at maturity.
E. The right to receive dividends of $1,000 per year.
Q:
Which of the following statements is true?
A. Interest on bonds is tax deductible.
B. Interest on bonds is not tax deductible.
C. Dividends to stockholders are tax deductible.
D. Bonds do not have to be repaid.
E. Bonds always increase return on equity.
Q:
A disadvantage of bonds is:
A. Bonds require payment of periodic interest.
B. Bonds require payment of par value at maturity.
C. Bonds can decrease return on equity.
D. Bond payments can be burdensome when income and cash flow are low.
E. All of the choices are correct.
Q:
An advantage of bond financing is:
A. Bonds do not affect owners' control.
B. Interest on bonds is tax deductible.
C. Bonds can increase return on equity.
D. It allows firms to trade on the equity.
E. All of the choices are correct.
Q:
All of the following statements regarding leases are true except:
A. For a capital lease the lessee records the leased item as its own asset.
B. For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the lessee does not.
C. Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D. Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.
E. For an operating lease the lessee reports the lease payments as rental expense.
Q:
A pension plan:
A. Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
B. Can be underfunded if the accumulated benefit obligation is more than the plan assets.
C. Can include a plan administrator who receives payments from the employer, invests them in pension assets, and makes benefit payments to pension recipients.
D. Can be a defined benefit plan in which future benefits are set, but the employer's contributions vary depending on assumptions about future pension assets and liabilities.
E. All of the choices are correct.
Q:
A company borrowed $50,000 cash from the bank and signed a 6-year note at 7%. The present value of an annuity for 6 years at 7% is 4.7665. The annual annuity payments equal:
A. $ 10,489.88.
B. $ 11,004.88.
C. $ 50,000.00.
D. $ 52,450.00.
E. $238,325.00.
Q:
A company must repay the bank a single payment of $10,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan is:
A. $10,000.
B. $12,400.
C. $ 7,938.
D. $ 9,200.
E. $ 7,600.
Q:
The carrying value of bonds at maturity is always equal to:
A. the amount of cash originally received in exchange for the bonds.
B. the par value that the issuer pays the holder.
C. the amount of discount or premium.
D. the amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.
E. $0.
Q:
The carrying value of a long-term note payable:
A. Is computed as the future value of all remaining future payments, using the market rate of interest.
B. Is the face value of the long-term note less the total of all future interest payments.
C. Is computed as the present value of all remaining future payments, discounted using the market rate of interest at the time of issuance.
D. Is computed as the present value of all remaining interest payments, discounted using the note's rate of interest.
E. Decreases each time period the discount on the note is amortized.
Q:
Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are:
A. Debentures.
B. Discounted notes.
C. Installment notes.
D. Indentures.
E. Investment notes.
Q:
To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by:
A. Safe deposit boxes.
B. Mortgages.
C. Equity.
D. The FASB.
E. Debentures.
Q:
Bonds that mature at different dates with the result that the entire principal amount is repaid gradually over a number of periods are known as:
A. Registered bonds.
B. Bearer bonds.
C. Callable bonds.
D. Sinking fund bonds.
E. Serial bonds.
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.