Chapter 9 quiz

 

1. If bonds are issued at a discount, over the life of the bonds, the carrying value will:

1. Increase.
2. Stay the same.
3. Depend on the current market interest rate.
4. Decrease.

 

2. When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds?

1. Carrying value and interest expense remain unchanged.
2. Carrying value increases and interest expense decreases.
3. Carrying value and interest expense increase.
4. Carrying value and interest expense decrease

 

3. Bonds issued at a discount are:

1. Issued at face value.
2. Issued below face value.
3. Issued above face value.
4. Riskier bonds sold at a bargain price.

 

4. An advantage of leasing an asset rather than purchasing the asset is:

1. Leases are not reported as liabilities in the balance sheet.
2. Leased assets are more likely to generate additional profits than are purchased assets.
3. Lease payments are tax deductible while depreciation on a purchased asset is not.
4. Leases typically require less cash upfront to begin using the asset.

 

5. Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded for interest expense for the first full month?

1. $500.
2. $3,042.
3. $6,000.
4. $2,542.

 

6. The market interest rate of a bond is:

1. A government-issued rate based on general economic conditions.
2. An implied rate based on the price investors pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.
3. The rate specified in the bond contract used to calculate the cash payments for interest.
4. The amount of principal to be returned to the bondholder at the maturity date.

 

7. A company leases an office building for 24 months. At the beginning of the lease period, the lessee (user) would:

1. All of the answers are correct.
2. Record a lease for the present value of the 24 lease payments.
3. Record a lease liability.
4. Record a lease asset.

 

8. Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as interest expense in the second month?

1. $500.
2. $6,000.
3. $487.
4. $513.

 

9. The issue price of a bond is calculated as:

1. The present value of the bond’s periodic interest payments over the life of the bond.
2. The present value of the bond’s face amount plus the present value of its periodic interest payments.
3. The bond’s face amount to be paid at maturity.
4. The present value of the bond’s face amount to be paid at maturity.

 

10. Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds’ carrying value will be

1. Below face amount.
2. Above face amount.
3. Above or below face value depending on current market interest rates.
4. At face amount.

 

11. Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month?

1. $6,000.
2. $2,542.
3. $3,042.
4. $500.

 

12.  In each succeeding payment on an installment note:

1. The amount that goes to interest expense is unchanged.
2. The amount that goes to interest expense decreases.
3. The amounts paid for both interest and principal increase proportionately.
4. The amount that goes to interest expense increases.

 

13. Convertible bonds:

1. Provide no potential benefits.
2. Provide potential benefits only to the borrower.
3. Provide potential benefits to both the lender and the borrower.
4. Provide potential benefits only to the lender.

 

14. Financial leverage is best measured by which of the following ratios?

1. The times interest earned ratio.
2. The debt to equity ratio.
3. The return on assets ratio.
4. The return on equity ratio.

 

15. The cash paid for interest on bonds payable is calculated as:

1. Carrying value times the stated interest rate.
2. Face amount times the stated interest rate.
3. Face amount times the market interest rate.
4. Carrying value times the market interest rate.

 

16. Douglas County Fairgrounds retires a $50 million bond issue when the carrying value of the bonds is $52 million, but the market value of the bonds is only $47 million. The entry to record the retirement will include:

1. No gain or loss on retirement.
2. debit of $5 million to loss on early extinguishment.
3. A debit to cash for $47 million.
4. A credit of $5 million to gain on early extinguishment.

 

17. Callable bonds:

1. Provide potential benefits to the issuer.
2. Provide potential benefits to the investor.
3. Provide potential benefits to both the issuer and the investor.
4. Provide no potential benefits.

 

18. Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the second month?

1. $3,042.
2. $2,555.
3. $2,542.
4. $2,529.

 

19. Bonds issued at a premium are:

1. Issued below face value.
2. Issued at face value.
3. Issued above face value.
4. Riskier bonds sold at a bargain price.

 

20. Which of the following is not a primary source of long-term debt financing?

1. Accounts payable.
2. Notes payable.
3. Bonds.
4. Leases.

 

21. Animal World issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Animal World decides to call the bonds. The company estimates that over the next eight years, they will save $16 million of cash interest. The journal entry to retire the bonds will include a:

1. Gain of $14 million.
2. Gain of $16 million.
3. Loss of $2 million.
4. Gain of $2 million.

 

22 Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is less common?

1. Unsecured and serial.
2. Secured and term.
3. Unsecured and term.
4. Secured and serial.

 

23 If bonds are issued at a discount, interest expense will be

1. Equal to cash interest paid.
2. Higher than cash interest paid.
3. Lower or higher depending on current market interest rates.
4. Lower than cash interest paid.

 

24  If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will:

1. Carrying value will decrease and interest expense will increase.
2. Both increase.
3. Both decrease.
4. Carrying value will increase and interest expense will decrease.

 

25 If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at

1. A discount.
2. A discount or premium depending on the maturity date.
3. A premium.
4. Face amount.

 

26. If bonds are issued at a discount, over the life of the bonds, interest expense will:

1. The effect cannot be determined from the information given.
2. Increase.
3. Remain unchanged.
4. Decrease.

 

27. Which of the following definitions describes a serial bond?

1. Matures on a single date.
2. Secured only by the “full faith and credit” of the issuing corporation.
3. Supported by specific assets pledged as collateral by the issuer.
4. Matures in installments.

 

28. Which of the following is true regarding a company assuming more debt?

1. Assuming more debt reduces leverage.
2. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds.
3. Assuming more debt is always good for the company.
4. Assuming more debt is always bad for the company.

 

29. A company’s capital structure refers to:

1. Its mixture of current versus long-term assets.
2. Its mixture of liabilities and stockholders’ equity.
3. Its mixture of paid-in capital versus retained earnings.
4. Its mixture of current versus long-term liabilities.

 

30. Which of the following is not an advantage of debt financing?

1. The ownership interest of current stockholders is unchanged.
2. The cost of borrowing may be lower than the return on equity.
3. Debt financing often has no maturity date.
4. Interest is tax deductible.