Question 1

A bond that will sell for a discount when the market rate is greater than the coupon rate.

Accepted Answer

When the market interest rate exceeds the coupon rate, the bond's fixed interest payments are less attractive compared to new bonds issued at the higher current market rate, leading it to sell at a discount to its face value.

Question 2

Once sold, bonds can be traded in the market place similar to shares of stock.

Accepted Answer

Bonds, like shares of stock, can be bought and sold in the secondary market after their initial issuance. This trading occurs on bond markets or exchanges.

Question 3

Zero-coupon notes do not pay periodic interest payments.

Accepted Answer

Zero-coupon notes do not pay periodic interest payments; instead, they are sold at a discount to their face value and pay the full face value at maturity.

Question 4

A bond selling for an amount above face value is said to be selling at a discount.

Accepted Answer

A bond selling for an amount above its face value is said to be selling at a premium, not at a discount. A discount refers to a bond selling for less than its face value.

Question 5

Bond ratings specify the amount at which investors can buy bonds from companies.

Accepted Answer

Bond ratings assess the creditworthiness of a corporation or government, indicating the risk level of the bond and its issuer, not the purchase price of bonds.

Question 6

Contingent liabilities that a company considers to be reasonably possible and for which a company is able to reasonably estimate the amount of a loss are recognized on the balance sheet and the income statement.

Accepted Answer

Contingent liabilities that are considered reasonably possible but can be estimated are disclosed in the notes to the financial statements, not recognized on the balance sheet or income statement.

Question 7

A finance lease transfers only the use of the leased asset to the lessee.

Accepted Answer

A finance lease transfers not only the use of the leased asset but also substantially all the risks and rewards incidental to ownership of the asset to the lessee.

Question 8

Recording a lease requires that both the leased asset and lease liability be reported on the balance sheet.

Accepted Answer

Under most accounting standards, including IFRS 16 and ASC 842, lessees are required to recognize both the right-of-use asset and lease liability on the balance sheet for most types of leases, reflecting the obligation to make lease payments and the right to use the underlying asset for the lease term.

Question 9

Liabilities are obligations resulting from past transactions that require the firm to pay money, provide goods, or perform services in the future.

Accepted Answer

Liabilities represent a company's financial debts or obligations that arise during the course of its business operations, which it is required to settle by transferring economic benefits including money, goods, or services.

Question 10

Current liabilities are limited to those obligations that require the payment of cash within the coming year or the operating cycle, whichever is longer.

Accepted Answer

Current liabilities include obligations that require payment within the coming year or operating cycle, but they are not limited to cash payments and can also involve the provision of goods or services.

Question 11

A contingent liability is an obligation that may develop from an existing situation depending on the occurrence of a future event.

Accepted Answer

A contingent liability is indeed an obligation that a company might have to pay in the future if a certain event occurs, but it is not certain that the event will happen.

Question 12

A contingent liability that will probably occur should be recorded in the accounts even though the amount cannot be reasonably estimated.

Accepted Answer

A contingent liability should only be recorded in the accounts if both the occurrence of the liability is probable and the amount can be reasonably estimated. If the amount cannot be reasonably estimated, it should be disclosed in the notes to the financial statements, not recorded as a liability.

Question 13

Lawsuits and credit guarantees are examples of contingent liabilities.

Accepted Answer

Contingent liabilities are potential liabilities that may occur depending on the outcome of a future event, such as lawsuits and credit guarantees, which become actual liabilities only if certain conditions are met.

Question 14

Interest on promissory notes is often structured as an amount paid in addition to the face amount of the note.

Accepted Answer

Interest on promissory notes is typically structured as an additional amount that the borrower pays to the lender, on top of repaying the principal amount (the face value of the note).

Question 15

The formula for determining the amount of interest to be paid on a promissory note is:
Interest = Principal x Interest rate x Time

Accepted Answer

This formula accurately calculates the amount of simple interest to be paid on a promissory note, where the principal is the initial amount borrowed, the interest rate is the percentage charged on the principal, and time is the period over which the interest is calculated.

Question 16

The financial statement effect of an advance payment for services is to increase revenues.

Accepted Answer

An advance payment for services is recorded as a liability (unearned revenue) on the balance sheet, not as an increase in revenues, until the service is performed.

Question 17

Sole proprietorships, partnerships and corporations are all taxable entities and incur a legal obligation for income taxes whenever income is earned.

Accepted Answer

Sole proprietorships and partnerships are not taxed as separate entities. Instead, their income is passed through to the owners or partners who then report the income on their personal tax returns. Corporations, however, are taxed as separate entities and incur a legal obligation for income taxes on their earnings.

Question 18

Quick ratio is another name for the current ratio.

Accepted Answer

The quick ratio and current ratio are two different liquidity ratios; the quick ratio excludes inventory and other less liquid current assets from the calculation, while the current ratio includes all current assets.

Question 19

The times-interest-earned ratio reflects the number of times that the company earned interest during the year.

Accepted Answer

The times-interest-earned ratio actually measures a company's ability to meet its interest payments, indicating how many times its earnings can cover its annual interest expenses.

Question 20

There are two cash flows associated with bonds-a single payment at maturity and periodic interest payments.

Accepted Answer

Bonds typically involve two types of cash flows: periodic interest payments (known as coupon payments) to the bondholder, and a single payment of the principal amount at maturity.

Quiz 9: Liabilities