Deck 14: Long-Term Liabilities

Question 1

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.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Question 5

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 6

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

Question 7

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 8

Term bonds are scheduled for maturity on one specified date,whereas serial bonds mature at more than one date.

Question 9

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

Question 10

Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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 38

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

Question 39

The present value of an annuity can be best or quickly computed as the sum of the individual future values for each payment.

Question 40

Interest payments on bonds are determined by multiplying the par value of the bond by the stated contract rate.

Question 41

Payments on installment notes normally include accrued interest plus a portion of the principal amount borrowed.

Question 42

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

Question 43

Two common ways of retiring bonds before maturity are to (1)exercise a call option or (2)purchase them on the open market.

Question 44

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

Question 45

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.

Question 46

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 47

Premium on Bonds Payable is an adjunct or accretion liability account.

Question 48

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

Question 49

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.

Question 50

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

Question 51

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

Question 52

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

Question 53

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.

Question 54

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

Question 55

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

Question 56

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 57

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 58

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

Question 59

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

Question 60

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.

Question 61

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.

Question 62

A company borrowed cash from the bank by signing a 5-year,8% installment note.The present value of an annuity factor at 8% for 5 years is 3.9927.Each annual payment equals $75,000.The present value of the note is:

A)$56,352.84.
B)$93,921,41.
C)$375,000.
D)$299,452.50.
E)$187,842.81.

Question 63

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.

Question 64

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.

Question 65

A company purchased equipment and signed a 7-year installment loan at 9% annual interest.The annual payments equal $9,000.The present value of an annuity factor for 7 years at 9% is 5.0330.The present value of the loan is:

A)$9,000.
B)$5,033.
C)$63,000.
D)$57,330.
E)$45,297.

Question 66

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.

Question 67

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.

Question 68

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.

Question 69

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.

Question 70

A company must repay the bank a single payment of $20,000 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 (rounded)is:

A)$15,877.
B)$12,400.
C)$5,592.
D)$9,200.
E)$47,630.

Question 71

A bond traded at 102½ means that:

A)The bond pays 2.5% interest.
B)The bond traded at 102.5% of its par value.
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 2½% above the contract rate.

Question 72

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.

Question 73

Bonds that have interest coupons attached to their certificates,which the bondholders present to a bank or broker for collection,are called:

A)Coupon bonds.
B)Callable bonds.
C)Serial bonds.
D)Convertible bonds.
E)Registered bonds.

Question 74

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.

Question 75

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest.The present value of an annuity factor for 6 years at 7% is 4.7665.The annual annuity payments equal:

A)$10,489.88.
B)$8,391.91.
C)$40,000.00.
D)$52,450.00.
E)$190,660.00.

Question 76

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.

Question 77

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.

Question 78

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 plan assets are more than the accumulated benefit obligation.
C)Is always funded fully by employers.
D)Can be a defined benefit plan or an undefined benefit plan.
E)Is the same as Other Postretirement Benefits.

Question 79

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.

Question 80

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.