Question 1

Under the effective-interest method, the interest paid each year is the same but the interest expense recorded is different.

Accepted Answer

Under the effective-interest method, the interest expense is calculated based on the carrying amount of the bond and the market interest rate, which changes each year, while the actual cash interest paid remains constant.

Question 2

If $240,000, 3%, bonds are issued on January 1, and pay interest semi-annually, the amount of interest paid on July 1 will be $3,600.

Accepted Answer

Calculation: $240000 × 3 % × (6/12) = $3,600.

Question 3

The debt to total assets ratio measures the percentage of the total assets provided by creditors.

Accepted Answer

The debt to total assets ratio is a financial ratio that measures the percentage of total assets provided by creditors. It is calculated by dividing total debt by total assets. Therefore, Option A is correct.

Question 4

Bonds held as investments should not be reported in the intangible assets section of the statement of ﬁnancial position.

Accepted Answer

Bonds held as investments should be reported under the section for investments in the statement of financial position, not under intangible assets.

Question 5

The ﬁnancial leverage ratio is a measure of a company's proﬁtability.

Accepted Answer

The financial leverage ratio is not a measure of profitability. It measures the amount of debt a company has relative to its assets or equity.

Question 6

The effective-interest method of amortization results in a constant percentage rate.

Accepted Answer

The effective-interest method of amortization results in a constant percentage rate. This is because the interest expense is based on the carrying value of the debt, which declines as payments are made, and the interest rate remains the same throughout the term of the debt.

Question 7

Match the deﬁnitions with the appropriate terms. Deﬁnition
A. The issue price of the bond.
B. A cash fund set up to retire bonds.
C. The theoretically correct approach to amortizing bond discount or premium.
D. Involves repayment of the bond in instalments.
E. The bond contract containing legal provisions relating to the bond.
F. None of the above. 
 
Term
 
____ 1. Equipment trust bond
____ 2. Effective-interest amortization method 
____ 3. Current cash equivalent amount 
____ 4. Serial bond 
____ 5. Ordinary payment bond 
____ 6. Debenture 
____ 7. Bond sinking fund 
____ 8. Straight-line amortization method 
____ 9. Indenture

Accepted Answer

The answer of Match the deﬁnitions with the appropriate terms....

Question 8

A high debt to equity ratio indicates reliance on creditor ﬁnancing thereby increasing the risk that a company will not be able to meet its obligations.

Accepted Answer

A high debt to equity ratio means that a company has more debt relative to equity. This indicates that the company is relying more on creditor financing rather than shareholder financing, which increases the risk that the company may not be able to meet its financial obligations.

Question 9

If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face amount of the bonds for all periods prior to the bond maturity date.

Accepted Answer

When bonds are issued at a premium, it means that their selling price is higher than their face amount. As a result, the carrying amount of the bonds will be greater than their face amount for all periods prior to maturity, as the premium will be amortized over the life of the bond.

Question 10

If the market rate of interest is greater than the contractual rate of interest, bonds will sell at a discount.

Accepted Answer

When the market rate of interest is greater than the contractual rate of interest, the bond's coupon rate is lower than the current market rate of interest, which makes the bond less attractive to investors. To compensate, the bond will sell at a discount, meaning the price will be lower than the face value of the bond.

Question 11

Typical non-current liabilities include lease obligations, asset retirement obligations, accrued retirement beneﬁts liability, and deferred income taxes.

Accepted Answer

Non-current liabilities represent obligations that are due more than one year in the future. The examples given, such as lease obligations and deferred income taxes, are typical non-current liabilities.

Question 12

Calculating the present value of bonds determines the price at which they should sell.

Accepted Answer

The present value of bonds is calculated to determine their fair price in the market, which factors the time value of money, interest rates, and the bond's cash flows. This fair price is the price at which the bond should sell.

Question 13

A high growth rate company may have a low times interest earned ratio because it has used debt to ﬁnance property, plant and equipment assets that are not yet generating a level of proﬁts expected to materialize in the future.

Accepted Answer

A high growth company may have invested heavily in property, plant, and equipment to expand their operations and generate future profits, but these assets may not be generating enough current profits to cover the interest expense on the debt used to finance them. This can result in a lower times interest earned ratio, even though the company is on a growth trajectory.

Question 14

The times interest earned ratio uses accrual based ﬁgures from the income statement for its calculation.

Accepted Answer

The times interest earned ratio, also known as the interest coverage ratio, uses accrual based figures such as operating income and interest expense from the income statement to calculate the ability of a company to make interest payments on its debt obligations.

Question 15

The times interest earned ratio is calculated by dividing net earnings by interest expense.

Accepted Answer

The times interest earned ratio is calculated by dividing earnings before interest and taxes (EBIT) by interest expense.

Question 16

When the effective-interest amortization method is used, the related interest expense for the period is determined by multiplying the stated interest rate by the book value of the bond at the beginning of the current period.

Accepted Answer

When the effective-interest amortization method is used, the related interest expense for the period is determined by multiplying the effective interest rate by the book value of the bond at the beginning of the current period. The effective interest rate takes into account any changes in the market interest rates and the premiums or discounts on the bond.

Question 17

The ﬁnancial leverage ratio compares the amount of capital supplied by creditors to the amount supplied by owners.

Accepted Answer

The financial leverage ratio, also known as debt-to-equity ratio, measures the proportion of debt and equity used to finance a company's assets. It compares the amount of capital provided by creditors (debt) to the amount provided by owners (equity).

Question 18

The times interest earned ratio measures the ability of a company to meet its interest obligations with resources from its proﬁt-making activities.

Accepted Answer

The times interest earned (TIE) ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) by its interest expenses. It shows how many times a company's earnings can cover its interest expenses. A higher TIE ratio indicates that the company is more capable of meeting its interest obligations from its profits. Therefore, the statement is true.

Question 19

If $100,000 bonds with a carrying amount of $93,500 are redeemed at 98, a loss on redemption will be recorded.

Accepted Answer

Calculation: $93,500 - ($100,000 × 98%) = ($4,500).

Question 20

The issuance and retirement of bonds have signiﬁcant impact on investing cash ﬂows.

Accepted Answer

The issuance and retirement of bonds impact financing cash flows, not investing cash flows. Investing cash flows relate to the acquisition and disposal of long-term assets and investments.

Quiz 10: Liabilities