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Finance
Q:
Paid and declared preferred dividends are called dividends in arrears.
Q:
All stock dividends are recorded at par value so there would never be a credit to the paid-in capital in excess of par value account.
Q:
A stock dividend decreases the market price of the company's stock.
Q:
A stock split increases total stockholders' equity.
Q:
Recording of a stock dividend results in a liability being recorded.
Q:
A reverse stock split increases the market value per share and the par value per share of stock.
Q:
A stock dividend does not reduce a corporation's assets or its stockholders' equity.
Q:
The declaration of cash dividends increases retained earnings.
Q:
A debit balance in retained earnings is referred to as an accumulated deficit.
Q:
A corporation may not legally give shares of its stock to promoters in exchange for their services in organizing the corporation.
Q:
Dividing stockholders' equity applicable to common shares by the number of common shares outstanding yields the book value per common share.
Q:
Dividend yield is computed by dividing earnings per share by the market value per share.
Q:
Growth stocks generally pay large dividends on a regular basis.
Q:
Dividend yield is defined as the annual cash dividends per share divided by the market price per share of a company's stock.
Q:
Stocks with a price-earnings ratio less than 20 to 25 are likely to be overpriced.
Q:
Robin Company had net income of $67,000. The company had 9,000 weighted average common shares outstanding. The basic earnings per share equal $7.44 per share.
Q:
The term restricted retained earnings refers to statutory but not contractual restrictions.
Q:
A corporation may be authorized to issue both common and preferred stock.
Q:
Stated value stock is no-par stock that is assigned a value per share by the corporation's board of directors.
Q:
Minimum legal capital requirements are intended to protect creditors.
Q:
The total number of shares outstanding is the authorized stock.
Q:
The price at which a share of stock is bought or sold is known as par value.
Q:
A registrar keeps stockholder records and prepares official lists of stockholders and dividend payments.
Q:
Common shareholders always share equally with all other shareholders in dividends.
Q:
Shareholders in a corporation have the power to bind the corporation to contracts.
Q:
Corporations avoid many of the state regulations and controls that proprietorships and partnerships are subject to.
Q:
Zhang Company has a loan agreement that provides it with cash today, and the company must pay $25,000 4 years from today. Zhang agrees to a 6% interest rate. The present value factor for 4 periods at 6% is 0.7921. What is the amount of cash that Zhang Company receives today?
Q:
Describe the journal entries required to record the issuance of bonds at a discount and the payment of bond interest, including any applicable amortization.
Q:
Describe installment notes and the nature of the typical payment pattern.
Q:
What is a bond? Identify and discuss the different characteristics and features bonds may possess.
Q:
G; 2. F; 3. H; 4. A; 5. D; 6. J; 7. B; 8. C; 9. E; 10. I
Short Answer Questions
Q:
Match each of the following terms with the appropriate definitions.
(a) Term bonds
(b) Coupon bonds
(c) Market rate
(d) Bond indenture
(e) Convertible bonds
(f) Bearer bonds
(g) Installment note
(h) Unsecured bonds
(i) Serial bonds
(j) Effective interest rate method __________
(1) An obligation requiring a series of periodic payments to the lender. __________
(2) Bonds that are payable to whoever holds them; also called unregistered bonds. __________
(3) Bonds that are backed by the issuer's general credit standing. __________
(4) Bonds that are scheduled for maturity on one specified date. __________
(5) The contract between the bond issuer and the bondholders; it identifies the rights and obligations of the parties. __________
(6) An accounting method that allocates interest expense over the bonds' life in a way that yields a constant rate of interest. __________
(7) Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection. __________
(8) The interest rate that borrowers are willing to pay and lenders are willing to accept for a particular bond at its risk level. __________
(9) Bonds that can be exchanged by the bondholders for a fixed number shares of the issuing corporation's common stock. __________
(10)Bonds that mature at more than one date and are usually paid over a number of periods.
Q:
F; 2. C; 3. H; 4. B; 5. J; 6. I; 7. E; 8. G; 9. D; 10. A
Q:
Match each of the following terms with the appropriate definitions.
(a) Discount on bonds
(b) Callable bonds
(c) Annuity
(d) Debt-to-equity ratio
(e) Sinking fund bonds
(f) Secured bonds
(g) Carrying value
(h) Premium on bonds
(i) Bond indenture
(j) Contract rate __________
(1) Bonds that have specific assets of the issuer pledged as collateral. __________
(2) A series of equal payments at equal time intervals. __________
(3) The amount by which the bond issue (selling) price exceeds the bond par value. __________
(4) Bonds that give the issuer an option of retiring them at a stated dollar amount prior to maturity. __________
(5) The interest rate specified in the bond indenture. __________
(6) The contract between the bond issuer and the bondholder(s) that identifies the rights and obligations of the parties. __________
(7) Bonds that require the issuer to create a fund of assets at specified amounts and dates to repay the bonds at maturity. __________
(8) The net amount at which bonds are reported on the balance sheet. __________
(9) The ratio of total liabilities to total stockholders' equity. __________
(10) The amount by which the bond par value exceeds the bond issue (selling) price
Q:
On January 1, a company issues 8%. 5 year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity for 10 periods at 3%........
8.5302 Present value of an annuity for 10 periods at 4%........
8.1109 Present value of 1 due in 10 periods at 3%................
0.7441 Present value of 1 due in 10 periods at 4%................
0.6756 What is the issue (selling) price of the bond?
A. $420,000
B. $402,362
C. $300,010
D. $308,107
E. $325,592
Q:
Sharmer Company issues 5%, 5 year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?
A. $957,355
B. $1,000,000
C. $1,250,000
D. $786,745
E. $1,213,255
Q:
Marwick Corporation issues 8%, 5 year bonds with a par value of $1,000,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?
A. $1,000,000
B. $789,244
C. $1,341,208
D.$ 1,085,308
E.$658,792
Q:
On January 1, Year 1, Stratton Company borrowed $100,000 on a 10-year, 7% installment note payable. The terms of the note require Stratton to pay 10 equal payments of $14,238 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is:
A.Debit Interest Expense $7,000; debit Notes Payable $7,238; credit Cash $14,238.
B.Debit Notes Payable $7,000; debit Interest Expense $7,238; credit Cash $14,238.
C.Debit Notes Payable $10,000; debit Interest Expense $7,000; credit Cash $17,000.
D.Debit Notes Payable $14,238; credit Cash $14,238.
E.Debit Notes Payable $10,000; debit Interest Expense $4,238; credit Cash $14,238.
Q:
On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of principle will be included in the first annual payment?
A. $20,000
B. $37,258
C. $25,000
D. $232,742
E. $17,258
Q:
On August 1, a $30,000, 6%, 3-year installment note payable is issued by a company. The note requires equal payments of principal plus accrued interest be paid each year on July 31. The present value of an annuity factor for 3 years at 6% is 2.6730. The payment each July 31 will be:
A.$10,000.00.
B.$11,223.34.
C.$10,800.00.
D.$10,400.00.
E.$1,223.34.
Q:
Chang Industries has bonds outstanding with a par value of $200,000 and a carrying value of $203,000. If the company calls these bonds at a price of $201,000, the gain or loss on retirement is:
A. $1,000 gain
B. $2,000 loss
C. $3,000 gain
D. $1,000 loss
E. $2,000 gain
Q:
Clabber Company has bonds outstanding with a par value of $100,000 and a carrying value of $97,300. If the company calls these bonds at a price of $95,000, the gain or loss on retirement is:
A. $5,000 loss
B. $2,700 gain
C. $2,700 loss
D. $2,300 loss
E. $2,300 gain
Q:
A company may retire bonds by all but which of the following means?
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.Paying all future interest and cancelling the debt.
Q:
A company issued 5-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $102,105 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is:
A.$3,500.00.
B.$7,000.00
C.$3,318.41.
D.$6,573.90
E.$1,750.00
Q:
A company issues 9% bonds with a par value of $100,000 at par on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash paid on July 1 to the bond holder(s) is:
A.$1,500.
B.$3,000.
C.$4,500.
D.$6,000.
E.$7,500.
Q:
Adonis Corporation 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%. Adonis 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 market value (price) 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 bond's life using a changing interest rate.
B.Allocates bond interest expense over the bond's 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:
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, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 and 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 $10,087 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 2015, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semi-annually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as:
A. Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
B. Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C. Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable $135,903.
D. Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000.
E. Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.
Q:
Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semi-annually. The current market rate is 8%. The amount of interest owed to the bondholders for each semiannual interest payment is.
A.$ 60,000.
B.$ 33,750.
C.$ 67,500.
D.$ 30,000.
E.$ 375,000.
Q:
A bond is issued at par value when:
A. The bond pays no interest.
B. The bond is not between interest payment dates.
C. Straight line amortization is used by the company.
D. The market rate of interest is the same as the contract rate of interest.
E. The bond is callable.
Q:
Saffron Industries 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:
Seedly 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:
Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):
A. 0.56
B. 1.80
C. 0.44
D. 0.80
E. 1.25
Q:
Which of the following accurately describes a debenture?
A.A bond with specific assets pledged as collateral.
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 a call option on callable bonds is:
A.The bondholder.
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.Reduce the risk of loss in comparison with unsecured debt.
B.Increase the risk of loss 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:
An advantage of bonds is:
A.Bonds do not affect owner control.
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.Bonds require payment of periodic interest.
Q:
A disadvantage 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.Bonds pay periodic interest and the repayment of par value at maturity.
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:
The carrying value of bonds at maturity always equals:
A.the amount of cash originally received in exchange for the bonds.
B.the par value of the bond.
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 is computed as:
A.The future value of all remaining payments, using the market rate of interest.
B. The face value of the long-term note less the total of all future interest payments.
C.The present value of all remaining payments, discounted using the market rate of interest at the time of issuance.
D.The present value of all remaining interest payments, discounted using the note's rate of interest.
E.The face value of the long-term note plus the total of all future interest payments.
Q:
A contract pledging title to assets as security for a note or bond is known as a (an):
A.Sinking fund.
B.Mortgage.
C.Equity.
D.Lease.
E.Indenture.
Q:
Bonds that mature at more than one date with the result that the principal amount is repaid 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 identifying 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:
Sinking fund bonds:
A.Require the issuer to set aside assets at specified amounts 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 effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.
Q:
The market value (issue price) of a bond is equal to the present value of all future cash payments provided by the bond.
Q:
A discount reduces the interest expense of a bond over its life.
Q:
A premium reduces the interest expense of a bond over its life.
Q:
The market rate for bonds is generally higher when the time period to maturity is longer due to the risk of adverse events occurring over the time period.
Q:
The use of debt financing ensures an increase in return on equity.
Q:
The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.
Q:
A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with interest.
Q:
A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.
Q:
An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.
Q:
The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies that an annuity of six $2,000 payments at 10% would equal $8,710.60.