Deck 10: Reporting and Analyzing Long-Term Liabilities

Question 1

Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.

Answer 1

True

Question 2

A bond with a par value of $1,000 trading at 101½ sells for a premium.

Answer 2

True

Question 3

A particular feature of callable bonds is that they 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.

Answer 3

False

Question 4

Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's stock.

Question 5

The relationship between the market rate of a bond and the rate of return on the borrowed funds affects the company's return on equity.

Question 6

A disadvantage of bond financing over equity financing is the burden on the cash flows of the company.

Question 7

Convertible bonds can be exchanged for a fixed number of shares of the issuing corporation's stock.

Question 8

Sinking fund bonds reduce the bondholder's risk by requiring the issuer to create a fund of assets to repay the bonds at maturity.

Question 9

Callable bonds give the issuer the option to retire them at a stated dollar amount prior to maturity.

Question 10

A bond with a par value of $1,000 trading at 97½ sells for a premium.

Question 11

The legal contract between the issuing corporation and the bondholders is called the bond indenture.

Question 12

A bond with a par value of $1,000 trading at 98 sells for a discount.

Question 13

Term bonds are scheduled for maturity on one specified date,whereas serial bonds mature at more than one date (often in series).

Question 14

Interest on bonds is tax deductible,while dividend payments are not tax deductible.

Question 15

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

Question 16

Interest on bonds is tax deductible.

Question 17

Bond market values are expressed as a percent of their par (face)value.

Question 18

One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible.

Question 19

Debentures always have specific assets of the issuing company pledged as collateral.

Question 20

A bond with a par value of $1,000 trading at 102½ sells for $1,025.

Question 21

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% is the equivalent of $8,710.60 today.

Question 22

An installment note is an obligation of the issuing company that requires a series of periodic payments to the lender.

Question 23

A basic present value concept is that cash paid or received in the future has less value now than the same amount of cash today.

Question 24

Finance leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Question 25

A pension plan is a contractual agreement between an employer and its employees to provide benefits to employees after they retire.

Question 26

An annuity is a series of equal payments at equal time intervals.

Question 27

Operating leases are long-term or noncancelable leases in which the lessor transfers substantially all the risks and rewards of ownership to the lessee.

Question 28

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.

Question 29

A company borrows $10,000 and issues a 5-year,6% installment note with interest payable annually.The factor for the present value of an annuity at 6% for 5 years is 4.2124.The factor for the present value of a single sum at 6% for 5 years is 0.7473.The amount of the annual payment is $2,373.94.

Question 30

A basic present value concept is that cash paid or received in the future has more value now than the same amount of cash received today.

Question 31

Mortgage bonds are backed only by the good faith and credit of the issuing company.

Question 32

Payments on an installment note normally include the accrued interest expense plus a portion of the amount borrowed.

Question 33

Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a borrower's assets identified in the mortgage if the borrower fails to make the required payments.

Question 34

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.

Question 35

A disadvantage of an operating lease is the inability to deduct rental payments in computing taxable income.

Question 36

Compounded means that interest during a second period is based on the total amount borrowed plus the interest accrued in the first period.

Question 37

The present value of an annuity is equal to the sum of the individual future values for each payment.

Question 38

An advantage of lease financing is the lack of an immediate large cash payment for the leased asset.

Question 39

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.

Question 40

The factor for the present value of an annuity 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.

Question 41

A company's debt-to-equity ratio was 1.0 at the end of Year 1.By the end of Year 2,it had increased to 1.7.Since the ratio increased from Year 1 to Year 2,the degree of risk in the firm's financing structure decreased during Year 2.

Question 42

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.

Question 43

When the contract rate on a bond issue is less than the market rate,the bonds sell at a discount.

Question 44

A company's ability to issue unsecured debt depends on its credit standing.

Question 45

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.

Question 46

The contract rate on previously issued bonds changes as the market rate of interest changes.

Question 47

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

Question 48

A bond is an issuer's written promise to pay an amount identified as the par value of the bond along with periodic interest payments.

Question 49

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

Question 50

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.

Question 51

The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.

Question 52

A company with a low level of liabilities in relation to stockholders' equity is likely to have a very high debt-to-equity ratio.

Question 53

The debt-to-equity ratio enables financial statement users to assess the risk of a company's financing structure.

Question 54

A lessee has substantially all of the benefits and risks of ownership in an operating lease.

Question 55

An advantage of bond financing is that issuing bonds does not affect owner control.

Question 56

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.

Question 57

A lessee has substantially all of the benefits and risks of ownership in a finance lease.

Question 58

A company has assets of $350,000 and total liabilities of $200,000.Its debt-to-equity ratio is 0.6.

Question 59

Periodic interest payments on bonds are determined by multiplying the par value of the bond by the contract rate.

Question 60

Bond interest paid by a corporation is an expense,whereas dividends paid are not an expense of the corporation.

Question 61

A premium reduces the interest expense of a bond over its life.

Question 62

A discount on bonds payable occurs when a company issues bonds with an issue price less than par value.

Question 63

When the contract rate of a bond is greater than the market rate on the date of issuance,the bond sells at a discount.

Question 64

When the contract rate is above the market rate,a bond sells at a premium.

Question 65

Premium on Bonds Payable has a normal credit balance,as it increases the carrying value of the bond.

Question 66

When the contract rate is above the market rate,a bond sells at a discount.

Question 67

The carrying (book)value of a bond payable is the par value of the bonds plus any discount or minus any premium.

Question 68

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.

Question 69

The carrying (book)value of a bond payable is the par value of the bonds plus any premium or minus any discount.

Question 70

Discount on Bonds Payable has a normal debit balance,as it reduces the carrying value of the bonds.

Question 71

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 total interest expense on the bond over its eight-year life is $400,000.

Question 72

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 discount amortized each period is $1,634.69.

Question 73

The carrying (book)value of a bond at the time it is issued is always equal to its par value.

Question 74

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.

Question 75

A discount reduces the interest expense of a bond over its life.

Question 76

The effective interest method assigns a bond interest expense amount that increases over the life of a premium bond.

Question 77

A premium on bonds occurs when bonds carry a contract rate greater than the market rate at issuance.

Question 78

Premium on Bonds Payable is an adjunct liability account,as it increases the carrying value of the bond.

Question 79

The market value (issue price)of a bond is equal to the present value of all future cash payments provided by the bond.

Question 80

When the contract rate on a bond issue is less than the market rate,the bonds sell at a premium.