Question 1

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:

Accepted Answer

A)  Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
B)  Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C)  Debit Interest Payable $14,000.00; credit Cash $14,000.00.
D)  Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.
E)  Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.F) A) and E)
G) A) and C)

Question 2

The debt-to-equity ratio:

Accepted Answer

A)  Is not relevant to secured creditors.
B)  Is calculated by dividing book value of secured liabilities by book value of pledged assets.
C)  Can always be calculated from information provided in a company's income statement.
D)  Must be calculated from the market values of assets and liabilities.
E)  Is a means of assessing the risk of a company's financing structure.F) A) and C)
G) A) and B)

Question 3

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Accepted Answer

A)  Debit Bond Interest Expense $14,000; credit Cash $14,000.
B)  Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.
C)  Debit Bond Interest Expense $28,000; credit Cash $28,000.
D)  Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash $14,200.
E)  Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash $14,000.F) A) and B)
G) All of the above

Question 4

Which of the following accurately describes a debenture?

Accepted Answer

A)  A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common stock.
B)  A bond with specific assets pledged as collateral.
C)  A type of bond which is not collateralized but backed only by the issuer's general credit standing.
D)  A type of bond issued in the names and addresses of the bondholders.
E)  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.F) A) and B)
G) A) and C)

Question 5

A pension plan:

Accepted Answer

A)  Can be underfunded if the plan assets are more than the accumulated benefit obligation.
B)  Is the same as Other Postretirement Benefits.
C)  Is always funded fully by employers.
D)  Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
E)  Can be a defined benefit plan or an undefined benefit plan.F) B) and D)
G) C) and D)

Question 6

A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.

Accepted Answer

A) True 
 B)False

Question 7

The use of debt financing ensures an increase in return on equity.

Accepted Answer

A) True 
 B)False

Question 8

Sinking fund bonds:

Accepted Answer

A)  Require equal payments of both principal and interest over the life of the bond issue.
B)  Require the issuer to set aside assets at specified amounts to retire the bonds at maturity.
C)  Decline in value over time.
D)  Are bearer bonds.
E)  Are registered bonds.F) C) and D)
G) A) and C)

Question 9

On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

Accepted Answer

A)  Credit to Paid-In Capital in Excess of Par Value, Common Stock $60,000.
B)  Debit to Bonds Payable $310,000.
C)  Debit to Premium on Bonds Payable $10,000.
D)  Credit to Common Stock $250,000.
E)  Debit to Bonds Payable $300,000.F) A) and E)
G) A) and B)

Question 10

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. 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.

Accepted Answer

A) True 
 B)False

Question 11

The carrying value of bonds at maturity always equals:

Accepted Answer

A)  the amount of cash originally received in exchange for the bonds.
B)  $0.
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)  the par value of the bond.F) C) and D)
G) A) and D)

Question 12

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties, is called a(n) :

Accepted Answer

A)  Debenture.
B)  Installment note.
C)  Bond indenture.
D)  Mortgage contract.
E)  Mortgage.F) A) and B)
G) A) and E)

Question 13

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  Investment notes.
B)  Debentures.
C)  Indentures.
D)  Installment notes.
E)  Discounted notes.F) A) and C)
G) None of the above

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

A company's total liabilities divided by its total stockholders' equity is called the:

Accepted Answer

A)  Return on total assets ratio.
B)  Equity ratio.
C)  Pledged assets to secured liabilities ratio.
D)  Times secured liabilities earned ratio.
E)  Debt-to-equity ratio.F) B) and D)
G) C) and E)

Question 17

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

Accepted Answer

A) True 
 B)False

Question 18

Explain the present value concept as it applies to long-term liabilities.

Accepted Answer

The basic present value concept is that ...

Question 19

Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

Accepted Answer

A)  $375,000.
B)  $67,500.
C)  $33,750.
D)  $60,000.
E)  $30,000.F) All of the above
G) C) and E)

Question 20

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The carrying value of the bonds immediately after the second interest payment is:

Accepted Answer

A)  $395,800.
B)  $400,000.
C)  $399,800.
D)  $396,200.
E)  $396,400.F) All of the above
G) C) and D)

Exam 14: Long-Term Liabilities

Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

Correct Answer
verified

A pension plan:

Correct Answer
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Explain the present value concept as it applies to long-term liabilities.

Correct Answer
verified
The basic present value concept is that ...
View Answer

Which of the following accurately describes a debenture?

Correct Answer
verified

The carrying value of bonds at maturity always equals:

Correct Answer
verified

A company's total liabilities divided by its total stockholders' equity is called the:

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Correct Answer
verified

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Correct Answer
verified

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. 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.

Correct Answer
verified

On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

Correct Answer
verified

The use of debt financing ensures an increase in return on equity.

Correct Answer
verified

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties, is called a(n) :

Correct Answer
verified

Correct Answer
verified

The debt-to-equity ratio:

Correct Answer
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Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

Correct Answer
verified

A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment is $12,000.

Correct Answer
verified

Correct Answer
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Sinking fund bonds:

Correct Answer
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Exam 14: Long-Term Liabilities

Morgan Company issues 9%, 20-year bonds with a par value of $750,000 that pay interest semiannually. The current market rate is 8%. The amount paid to the bondholders for each semiannual interest payment is:

Correct AnswerverifiedShow Answer

A pension plan:

Correct AnswerverifiedShow Answer

Explain the present value concept as it applies to long-term liabilities.

Correct AnswerverifiedThe basic present value concept is that ...View AnswerShow Answer

Which of the following accurately describes a debenture?

Correct AnswerverifiedShow Answer

The carrying value of bonds at maturity always equals:

Correct AnswerverifiedShow Answer

A company's total liabilities divided by its total stockholders' equity is called the:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.

Correct AnswerverifiedShow Answer

On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Correct AnswerverifiedShow Answer

On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of $473,845. 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.

Correct AnswerverifiedShow Answer

On January 1, $300,000 of par value bonds with a carrying value of $310,000 is converted to 50,000 shares of $5 par value common stock. The entry to record the conversion of the bonds includes all of the following entries except:

Correct AnswerverifiedShow Answer

The use of debt financing ensures an increase in return on equity.

Correct AnswerverifiedShow Answer

The contract between the bond issuer and the bondholders identifying the rights and obligations of the parties, is called a(n) :

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The debt-to-equity ratio:

Correct AnswerverifiedShow Answer

Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Sinking fund bonds:

Correct AnswerverifiedShow Answer

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verified

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verified
The basic present value concept is that ...
View Answer

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