Question 1

When the market rate of interest on bonds is equal to the contract rate,the bonds will sell at:

Accepted Answer

When the market rate of interest on bonds is equal to the contract rate (also referred to as the coupon rate or stated rate), it means the bond is priced at par or its face value. Therefore, the bonds will sell at their face value. Bonds sell at a premium when the contract rate is higher than the market rate, and at a discount when the contract rate is lower than the market rate.

Question 2

The charter of a corporation provides for the issuance of 100,000 shares of common stock.Assume that 75,000 shares were originally issued and 5,000 were subsequently reacquired.What is the number of shares outstanding?

Accepted Answer

The number of shares outstanding is calculated by subtracting the number of shares reacquired from the total number of shares issued. Therefore, 100,000 - 5,000 = 95,000 total shares issued, and 95,000 - 75,000 = 20,000 shares outstanding. However, the question asks specifically for the number of shares outstanding after the reacquisition, so the answer is only the number of outstanding shares, which is 75,000 - 5,000 = 70,000 shares. Therefore, the best choice is B.

Question 3

The interest rate specified in the bond indenture is called the:

Accepted Answer

The contract rate, also known as the coupon rate, is the interest rate specified in the bond indenture. It is the rate at which the issuer agrees to make interest payments to bondholders.

Question 4

If $4,000,000 of 12% bonds are issued at 103 1/4,the amount of cash received from the sale is:

Accepted Answer

The bonds are issued at 103 1/4, which means they are sold for 103.25% of their face value. 
So, the cash received from the sale of the bonds is:
$4,000,000 x 103.25% = $4,130,000

Question 5

The par value per share of common stock represents:

Accepted Answer

The par value per share of common stock represents the monetary amount assigned to each share of stock in the articles of incorporation. It is not necessarily the minimum selling price or the minimum amount the stockholder will receive when the corporation is liquidated. It also does not determine the amount of dividends per share to be received each year.

Question 6

If bonds are issued at a premium,the stated interest rate is:

Accepted Answer

If bonds are issued at a premium, it means that the price paid by investors is higher than the face value of the bond. This implies that the effective interest rate paid by the issuer is lower than the stated interest rate. Therefore, to compensate investors for paying a higher price, the stated interest rate on the bonds will be higher than the prevailing market rate of interest.

Question 7

If the market rate of interest is greater than the contractual rate of interest,bonds will sell:

Accepted Answer

When the market rate of interest is greater than the contractual rate of interest, investors are not interested in buying bonds that offer lower returns. As a result, the bond's value decreases and it sells at a discount.

Question 8

When the contract rate of interest on bonds is less than the market rate of interest,the bonds sell at:

Accepted Answer

When the contract rate of interest on bonds is less than the market rate of interest, the bonds sell at a discount. This is because investors are demanding a higher rate of return than what is offered by the contract rate, which decreases the value of the bond on the market.

Question 9

A is a contract between the corporation issuing the bonds and the bondholders.

Accepted Answer

A bond indenture is a legal document that outlines the terms and conditions of a bond agreement, including the rights and responsibilities of both the issuer and the bondholders. It specifies the interest rate, the maturity date, any collateral or security, and other details of the bond issuance.

Question 10

Stockholders' equity:

Accepted Answer

Stockholders' equity includes retained earnings (profits that have been kept in the company) and paid-in capital (money investors contributed to the company in exchange for ownership). It does not necessarily equal cash on hand and is not shown on the income statement. B is incorrect because total liabilities are not part of stockholders' equity.

Question 11

Prior to the last weekly payroll period of the calendar year,the cumulative earnings of employees A and B are $106,150 and $91,000,respectively.Their earnings for the last completed payroll period of the year are $850 each.Social security tax rate is 6% on maximum of $106,800.All earnings are subject to Medicare tax of 1.5%.Assuming that the payroll will be paid on December 29,what will be the employer's total FICA tax for this payroll period on the two salary amounts of $850 each?

Accepted Answer

- Employee A has earned $106,150 prior to the last payroll period and earned an additional $850 during the current payroll period, bringing the total earnings to $107,000.
- Employee B has earned $91,000 prior to the last payroll period and earned an additional $850 during the current payroll period, bringing the total earnings to $91,850.
- The Social Security tax rate is 6% on a maximum of $106,800. Therefore, both employees have reached the maximum taxable earnings for Social Security.
- The Medicare tax rate is 1.5% on all earnings.
- Employer FICA tax is equal to the combined Social Security and Medicare taxes.
- For Employee A, Social Security tax is 6% of $106,800 ($6,408) and Medicare tax is 1.5% of $107,000 ($1,605), totaling $7,013. For Employee B, Social Security tax is 6% of $91,850 ($5,511) and Medicare tax is 1.5% of $91,850 ($1,378), totaling $6,889.
- Therefore, the employer's total FICA tax for this payroll period on the two salary amounts of $850 each is $7,013 + $6,889 = $13,902, which is divided by 2 (since there are two employees) to get $6,951. This amount is then divided by 24 (the number of payroll periods in a year) to get $289.63. Finally, since the question is asking for the FICA tax on just this payroll period, we subtract the FICA taxes paid on previous payrolls. Employee A has had FICA tax of $7,013 withheld in previous payroll periods and Employee B has had FICA tax of $6,889 withheld in previous payroll periods, making the total FICA taxes paid on previous payrolls $13,902. So the FICA tax due for this payroll period is $289.63 - $13,902 = -$13,612.37. However, payroll taxes cannot be negative, so the employer's total FICA tax for this payroll period is $0 plus any state or local payroll taxes that may apply. 
- The only answer option closer to this result is B.

Question 12

Payroll taxes levied against employees become liabilities:

Accepted Answer

The answer of Payroll taxes levied against employees become liabilities:
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Question 13

If the market rate of interest is 10%,a $10,000,12%,10-year bond that pays interest semiannually would sell at an amount:

Accepted Answer

The answer of If the market rate of interest is...

Question 14

The market interest rate related to a bond is also called the:

Accepted Answer

The market interest rate related to a bond is also known as the effective interest rate, which is the rate that investors demand as a return on their investment in the bond. The stated interest rate, contract interest rate, and straight-line rate are not synonyms for the market interest rate.

Question 15

If $1,000,000 of 10% bonds are issued at 98,the amount of cash received from the sale is:

Accepted Answer

When bonds are issued at 98, it means they are issued at 98% of their face value. Therefore, $1,000,000 * 98% = $980,000.

Question 16

Most employers are required to withhold from employees for:

Accepted Answer

Most employers are required to withhold only federal income tax from their employees. While some states may require employers to withhold state income tax, it is not a universal requirement. Federal and state unemployment compensation taxes are paid by the employer, not withheld from employee paychecks.

Question 17

If $500,000 of 8% bonds are issued at 102,the amount of cash received from the sale is:

Accepted Answer

The bonds have a face value of $500,000 and are being sold at 102, which means they are being sold for 102% of their face value.

The amount of cash received from the sale is calculated as:
Cash received = Face value x Sale price
Cash received = $500,000 x 1.02
Cash received = $510,000

Therefore, the correct answer is B) $510,000.

Question 18

When the contract rate of interest on bonds is higher than the market rate of interest,the bonds sell at:

Accepted Answer

When the contract rate of interest on bonds is higher than the market rate, investors are willing to pay more for the bonds because they offer a higher return than what is currently available in the market, hence they sell at a premium.

Question 19

The charter of a corporation provides for the issuance of 100,000 shares of common stock.Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired.What is the number of shares outstanding?

Accepted Answer

The number of shares outstanding is calculated by subtracting the number of shares reacquired from the number of shares originally issued. Therefore, the number of shares outstanding is 60,000 - 5,000 = 55,000.

Question 20

Most employers are levied a tax on payrolls for:

Accepted Answer

Employers are levied a tax on payrolls for federal unemployment compensation tax. This tax is used to provide unemployment benefits to workers who have lost their jobs through no fault of their own.

Quiz 8: Liabilities and Stockholders Equity