Question 1

The interest coverage ratio measures the degree of protection a company has from default on interest payments.

Accepted Answer

A) True 
 B)False

Question 2

Interest on debt is tax-deductible to the issuing corporation,whereas dividends on stock are not.

Accepted Answer

A) True 
 B)False

Question 3

The carrying value of a bond issued at a premium is calculated at any given point in time by adding the balance of the unamortized premium to the bond's face value.

Accepted Answer

A) True 
 B)False

Question 4

Term bonds are

Accepted Answer

A)  bonds that have a single maturity date.
B)  bonds secured by specific assets of the issuing corporation.
C)  issued only by the federal government.
D)  issued on the general credit of the corporation and do not pledge certain assets as collateral.E) A) and C)
F) A) and B)

Question 5

Under a defined benefit pension plan,

Accepted Answer

A)  the pension expense account must be determined by actuarial calculations.
B)  the employer guarantees the employee certain benefits upon retirement.
C)  the annual contribution is based on estimated future benefits.
D)  All of these choices.E) All of the above
F) A) and B)

Question 6

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Accepted Answer

A) True 
 B)False

Question 7

Bonds that contain a provision that allows the issuing corporation to buy back the bonds prior to the maturity date are called

Accepted Answer

A)  secured bonds.
B)  callable bonds.
C)  convertible bonds.
D)  debenture bonds.E) None of the above
F) B) and C)

Question 8

Promises to pay employees pensions after they retire are difficult to identify and value and therefore need not be recognized in the financial statements until cash payment is made.

Accepted Answer

A) True 
 B)False

Question 9

Managers need to understand how long-term liabilities are

Accepted Answer

A)  valued.
B)  classified.
C)  recognized.
D)  All of these choices.E) C) and D)
F) B) and D)

Question 10

The amount of cash received on issuance of a 9 percent,$10,000 bond dated February 1 and issued June 1 at 102 1/2 is

Accepted Answer

A)  $10,300.
B)  $11,100.
C)  $10,200.
D)  $10,550.E) All of the above
F) None of the above

Question 11

A company has $450,000 in bonds payable with an unamortized discount of $10,500.If two-thirds of the bonds are converted to common stock,the carrying value of the bonds payable will decrease by

Accepted Answer

A)  $146,500.
B)  $293,000.
C)  $307,000.
D)  $314,000.E) B) and C)
F) B) and D)

Question 12

The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is not true about trading on the equity?

Accepted Answer

A)  It can become a disadvantage to a corporation.
B)  It is another phrase for financial leverage.
C)  It will increase the number of shares of stock owned.
D)  It will increase the interest a corporation must pay.E) A) and C)
F) All of the above

Question 14

A corporation's bondholders are the primary recipients of financial leverage.

Accepted Answer

A) True 
 B)False

Question 15

Knollwood Corporation issued $278,000 of 30-year,8 percent bonds at 106 on one of its semiannual interest dates.The straight-line method of amortization is to be used.After 11 years,what is the carrying value of the bonds?

Accepted Answer

A)  $286,340
B)  $286,896
C)  $284,950
D)  $288,564E) None of the above
F) All of the above

Question 16

Bond issue costs have the effect of

Accepted Answer

A)  decreasing a bond discount.
B)  increasing a bond premium.
C)  decreasing the effective interest rate.
D)  decreasing a bond premium.E) B) and C)
F) A) and D)

Question 17

A company with income before income taxes of $194,000,and $20,000 in interest expense,has an interest coverage ratio of

Accepted Answer

A)  10.7 times.
B)  8.7 times.
C)  9.7 times.
D)  1.1 times.E) All of the above
F) A) and B)

Question 18

Unamortized Bond Discount is a contra-liability account.

Accepted Answer

A) True 
 B)False

Question 19

If Rex Corporation issued ten $1,000 bonds issued at 99.75 on the interest date,the entry to record this transaction is :

Accepted Answer

A)  
B)  
C)  
D)  E) All of the above
F) None of the above

Question 20

Entering into a lease is an example of off-balance-sheet financing.

Accepted Answer

A) True 
 B)False

Exam 14: Long Term Liabilities

A company has $450,000 in bonds payable with an unamortized discount of $10,500.If two-thirds of the bonds are converted to common stock,the carrying value of the bonds payable will decrease by

Correct AnswerverifiedShow Answer

A company with income before income taxes of $194,000,and $20,000 in interest expense,has an interest coverage ratio of

Correct AnswerverifiedShow Answer

Unamortized Bond Discount is a contra-liability account.

Correct AnswerverifiedShow Answer

Bonds that contain a provision that allows the issuing corporation to buy back the bonds prior to the maturity date are called

Correct AnswerverifiedShow Answer

Promises to pay employees pensions after they retire are difficult to identify and value and therefore need not be recognized in the financial statements until cash payment is made.

Correct AnswerverifiedShow Answer

Under a defined benefit pension plan,

Correct AnswerverifiedShow Answer

A corporation's bondholders are the primary recipients of financial leverage.

Correct AnswerverifiedShow Answer

Knollwood Corporation issued $278,000 of 30-year,8 percent bonds at 106 on one of its semiannual interest dates.The straight-line method of amortization is to be used.After 11 years,what is the carrying value of the bonds?

Correct AnswerverifiedShow Answer

Which of the following statements is not true about trading on the equity?

Correct AnswerverifiedShow Answer

Managers need to understand how long-term liabilities are

Correct AnswerverifiedShow Answer

Bond issue costs have the effect of

Correct AnswerverifiedShow Answer

If Rex Corporation issued ten $1,000 bonds issued at 99.75 on the interest date,the entry to record this transaction is :

Correct AnswerverifiedShow Answer

The interest coverage ratio measures the degree of protection a company has from default on interest payments.

Correct AnswerverifiedShow Answer

A bond discount is a component of interest cost because it represents the amount in excess of the issue price that a corporation must pay on the maturity date.

Correct AnswerverifiedShow Answer

Interest on debt is tax-deductible to the issuing corporation,whereas dividends on stock are not.

Correct AnswerverifiedShow Answer

The carrying value of a bond issued at a premium is calculated at any given point in time by adding the balance of the unamortized premium to the bond's face value.

Correct AnswerverifiedShow Answer

The present value of a bond is determined by subtracting the discounted value of the payment at maturity from the discounted value of a series of fixed interest payments.

Correct AnswerverifiedShow Answer

Entering into a lease is an example of off-balance-sheet financing.

Correct AnswerverifiedShow Answer

Term bonds are

Correct AnswerverifiedShow Answer

The amount of cash received on issuance of a 9 percent,$10,000 bond dated February 1 and issued June 1 at 102 1/2 is

Correct AnswerverifiedShow Answer

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