Question 1

If Tanner Company becomes less creditworthy, the market price of its bonds will decline.

Accepted Answer

The creditworthiness of a company affects the perceived risk of default on its bonds. If the company becomes less creditworthy, investors will demand a higher yield to compensate for the increased risk, which will decrease the market price of its bonds.

Question 2

[APPENDIX] A decrease in deferred taxes liability) would appear on the statement of cash flows, prepared using the indirect method as an)
A)addition to net income in the operating activities category.
B)deduction to net income in the operating activities category.
C)inflow of cash in the financing activities category.
D)outflow of cash in the financing activities category.

Accepted Answer

A decrease in deferred taxes liability would mean that less cash is required to pay taxes in the future, resulting in an increase in cash flow from operating activities. However, since the question asks about the effect on the statement of cash flows using the indirect method, the decrease in deferred taxes liability would be deducted from net income in the operating activities category. This is because net income is calculated on an accrual basis and includes the effects of deferred taxes, which must be adjusted for in order to arrive at the cash flows from operating activities. The decrease in deferred taxes liability would not be recorded as an inflow or outflow of cash in the financing activities category.

Question 3

[APPENDIX] Deferred income taxes is a balance sheet item for Iowa Products Company.How would it most likely be classified on the balance sheet?
A)Owners' equity
B)Long-term liability
C)Expense
D)Contra liability

Accepted Answer

Deferred income taxes are a liability that represents the future tax consequences of events that have already been recognized in the financial statements. They are considered a long-term liability because they are expected to be paid beyond the current operating cycle of the company.

Question 4

If an investor has the right to retire the bonds, they are referred to as callable.

Accepted Answer

The answer of If an investor has the right to...

Question 5

Bonds are generally issued in denominations of $1,000.

Accepted Answer

Bonds are typically issued in denominations of $1,000. This means that each bond has a face value of $1,000 and can be bought and sold in increments of $1,000.

Question 6

The face rate is also called the nominal or stated rate.

Accepted Answer

The face rate is another term for the nominal rate or stated rate.

Question 7

Bonds are typically issued in denominations of $10,000.

Accepted Answer

Bonds can be issued in various denominations, not just $10,000. They can also be issued in smaller or larger denominations depending on the terms of the bond.

Question 8

Callable bonds may be retired by the issuer before their specified due date.

Accepted Answer

Callable bonds give the issuer the option to retire the bond before its specified due date.

Question 9

Serial bonds are unique because the interest is paid as a series of daily payments.

Accepted Answer

Serial bonds are a type of bond in which a portion of the total amount is paid off at regular intervals, rather than all at once at maturity. However, the interest on a serial bond is typically paid at fixed intervals, such as semi-annually or annually, and not as a series of daily payments.

Question 10

A bond issue price is the present value of the cash flows that the bond will produce.

Accepted Answer

The bond issue price is determined by calculating the present value of the cash flows that the bond will produce. This includes the interest payments and the principal payment at maturity.

Question 11

[APPENDIX] The attitude of the Financial Accounting Standards Board toward deferred tax liabilities is that they are
A)an amount that results in a future obligation and meets the definition of a liability.
B)a bookkeeping item that is used merely to maintain equality of the accounting equation.
C)not true liabilities because the balance increases every year.
D)not payable in the immediate future so it not necessary to record them.

Accepted Answer

The Financial Accounting Standards Board considers deferred tax liabilities as liabilities because they create a future obligation that meets the definition of a liability, as they represent future tax payments that will be due.

Question 12

[APPENDIX] Stockton Corporation has made an accounting entry to record deferred taxes as a liability resulting from temporary differences between accounting income and taxable income.Which of the following statements is true?
A)Deferred tax will be decreased.
B)Stockholders' equity will be increased.
C)Stockholders' equity will be decreased.
D)Assets will be decreased.

Accepted Answer

Accounting for deferred taxes creates a liability on the balance sheet, which decreases stockholders' equity. None of the other options are affected by this accounting entry.

Question 13

[APPENDIX] Marshland Company uses the straight-line depreciation for financial reporting purposes and an accelerated depreciation method for tax purposes.As a result, Marshland will record:
A)a deferred tax asset.
B)a deferred tax liability.
C)a permanent difference.
D)tax-exempt depreciation.

Accepted Answer

Since Marshland is using two different depreciation methods, they will have different depreciation expenses for financial reporting and tax purposes. This will result in a difference between the taxable income and financial income. This difference is called a temporary difference and will result in a deferred tax liability on the balance sheet.

Question 14

The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.

Accepted Answer

This is a common risk associated with investing in bonds. If a company defaults on its debts, bondholders may not receive their expected interest payments and may even lose some or all of their principal investment.

Question 15

Convertible bonds normally sell at a higher price than non-convertible bonds.

Accepted Answer

Convertible bonds offer the option to convert into equity, making them more attractive to investors. This feature, along with potentially lower interest rates, can drive up the price of convertible bonds compared to non-convertible bonds.

Question 16

All liabilities that are not classified as current liabilities are classified as long-term.

Accepted Answer

This statement is true. Current liabilities are those debts that are due within one year, while long-term liabilities are those debts that are due after one year. Therefore, if a liability is not classified as a current liability, it must be a long-term liability.

Question 17

Debenture bonds are backed by specific collateral of the issuing company.

Accepted Answer

Debenture bonds are unsecured and not backed by specific collateral. They rely on the creditworthiness and general assets of the issuing company.

Question 18

Discount on Bonds Payable is classified as a current liability.

Accepted Answer

Discount on Bonds Payable is classified as a long-term liability, not a current liability. It is a contra account to Bonds Payable and represents the difference between the face value of the bonds and the amount received when the bonds were issued, due to the bonds being issued at a discount.

Question 19

[APPENDIX] When a company has a credit balance in its Deferred Tax account, this amount would appear as an)
A)contra asset on the balance sheet.
B)stockholders' equity account on the balance sheet.
C)expense account on the income statement.
D)liability account on the balance sheet.

Accepted Answer

A credit balance in the Deferred Tax account indicates a future tax liability, hence it appears as a liability on the balance sheet.

Question 20

[APPENDIX] For 2015, Wasabi Company has accounting revenues of $6,000.However, because of temporary differences between tax and accounting, $1,000 of this is not subject to tax.If expenses are $3,000 for both tax and accounting, and the tax rate is 40%, what is the amount of tax payable to the IRS?
A)$ 400
B)$ 800
C)$1,200
D)$1,600

Accepted Answer

To calculate taxable income, we need to adjust the revenues and expenses for temporary differences. 
Taxable Income = Accounting Income - Temporary Differences
Taxable Income = $6,000 - $1,000 = $5,000 
Thus, the tax payable to the IRS is:
Tax Payable = Taxable Income * Tax Rate
Tax Payable = $5,000 * 0.40 = $2,000 
However, we need to adjust for the temporary difference that is not subject to tax:
Adjusted Tax Payable = Tax Payable - (Temporary Difference * Tax Rate)
Adjusted Tax Payable = $2,000 - ($1,000 * 0.40) = $1,600 
Therefore, the correct answer is B) $800.

Quiz 10: Long-Term Liabilities

If Tanner Company becomes less creditworthy, the market price of its bonds will decline.

[APPENDIX] A decrease in deferred taxes liability) would appear on the statement of cash flows, prepared using the indirect method as an)

[APPENDIX] Deferred income taxes is a balance sheet item for Iowa Products Company.How would it most likely be classified on the balance sheet?