mgmt chapter 9
In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:
Debt
In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:
Equity
What information does the times interest earned ratio provide to investors or creditors?
It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.
_________has grown into the most popular method of external financing of corporate assets in America
Leasing
Which of the following are possible benefits of leasing an asset rather than purchasing an asset?
Lower periodic payments on the asset Improvement in cash flows Protection against declining asset value
Which of the following are methods of long-term financing with debt?
Notes payable Bonds Leases
_________bonds are supported by a specific asset the issuer pledges as collateral.
Secured
During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?
The balance is $48,880. Reason: $50,000 - (5,120 - 4,000 interest)
At the beginning of a lease period, the lessee records
a lease asset and lease payable for the present value of the lease payments.
Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at
a premium
A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)
bond.
A corporation that wishes to borrow from the general public rather than a bank will issue
bonds.
A high times interest earned ratio indicates the company
can meet its interest obligations as they become due.
The mixture of debt financing and equity financing a company uses is referred to as the company's ______structure.
capital
You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0
company d
True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.
false
True or false: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.
false
True or false: The times interest earned formula is net income divided by interest expense.
false
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of __________ risk
financial
A bond will be issued at a discount when the market rate of interest is
greater than the stated rate.
Which of the following provides the clearest indication of an organization's ability to pay current and future interest.
high earnings relative to interest expense
The times interest earned ratio provides an indication of
how many times greater earnings are than interest expense.
The return on assets measures the amount of _______ generated for each dollar of assets.
income
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by
interest expense
An advantage to financing with debt is that
interest is tax deductible
Improved cash flows is a common advantage of acquiring equipment through
leasing
A bond will be issued at a premium when the market rate of interest is ______ the stated rate.
less than
A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as financial _____
leverage
_____ enables a company to earn a higher return using debt than without debt.
leverage
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:
long-term debt
Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:
long-term liabilities
The _______rate of interest is an implied rate based on the price investors pay to purchase a bond
market
The terms "effective interest rate" and "yield rate" refer to the ________ interest rate.
market
The rate of interest printed on the face of a bond is referred to as the _________ interest rate
stated, nominal, coupon, or face
Bondholders are willing to pay a premium to acquire a bond because ______.
the bond's stated interest rate is higher than the market interest rate
The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the
times interest earned ratio
Most bonds issued today are ______.
unsecured
Common terms used for the market interest rate are:
yield rate effective interest rate
Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?
Interest expense based on the beginning period carrying value and the effective rate of the loan The cash paid each payment period The decrease in the carrying value of the note The carrying value of the note at the end of the period
Periodic payments on installment notes typically include
a portion that reduces the outstanding loan balance. a portion that reflects interest
Which of the following are common characteristics or provisions of bonds?
secured or unsecured callable convertible
The________ rate of interest on a bond is the interest rate printed on the bond, whereas the __________rate of interest is the current rate of interest being paid on investments with similar characteristics
stated; market
The two types of financing are
equity financing. debt financing.
Loans requiring periodic payments of interest and principle are referred to as ______notes
installment
The journal entry to recognize the signing of an installment notes payable includes:
Debit Cash Credit Notes Payable
On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:
$13,000
XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company?
$5,000 current note payable; $45,000 long-term note payable
At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:
$8,600 Rationale:$10,000 - $(2,000 - (10,000 x .06) = $8,600
The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______
Cash; Bonds Payable
Which of the following are typically shown in an amortization schedule related to an installment notes payable?
The carrying value of the note at the beginning of the period The cash paid each payment period The carrying value of the note at the end of the period
Identify two ratios commonly used to assess a company's financial risk.
Times interest earned ratio Debt to equity ratio
The debt to equity ratio is calculated as
Total Liabilities divided by Total Stockholders' Equity
Which of the following are the most common types of bonds?
Unsecured
When is it more economical for a company to borrow funds by issuing bonds?
When the interest savings exceed the additional bond issuance costs.
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.
a credit to Cash of $6,000 a debit to Interest expense of $6,000
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.
a credit to Interest payable of $500 a debit to Interest expense of $500
Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:
a discount
Smith Company enters into a lease agreement with Rent-All Corp. The present value of the lease payments is equal to $25,000. Smith records:
credit lease payable $25,000 debit lease asset $25,000
Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:
credit to Notes Payable for $24,000
The higher a company's earnings relative to its interest expense, the more likely it is that it will be able to pay its
current and future interest payments.
Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records:
debit lease asset $50,000; credit lease payable $50,000
If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a
debit to Cash of $100,000 and a credit to Bonds payable of $100,000.
______financing refers to borrowing money from creditors
debt
Financing with ________ requires borrowing, whereas financing with _______requires issuing shares of stock.
debt; equity
Market rates of bonds vary depending on the_____ risk of the company issuing the bonds.
default
The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's ____ risk.
default
The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:
default risk
On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to
notes payable for $1,120. interest expense for $4,000.
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) _________placement.
private
Which of the following financial ratios provides information about the income generated per dollar of assets?
return on assets
The debt to equity ratios for three otherwise comparable companies are as follows: Adams: 1.5; Flagler: 1.8; Roberts: 1.4. The risk of bankruptcy appears to be lowest for:
roberts
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
________bond is backed by a lien on specified real estate owned by the issuer.
secured
Bonds that are backed by collateral are ______.
secured bonds
_________financing refers to obtaining investment from stockholders
Equity, Shareholder, Stockholder
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False
True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.
False
A company that earns a return in excess of the cost of borrowing the funds is providing its shareholder with a greater return than what would have been earned with ______.
equity
Debt can be an advantage for stockholders if it
earns a return on borrowed funds that exceeds the cost of borrowing.
Debt is considered a lower cost method of financing than equity because
interest on debt is tax deductible.
_________is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.
lease
A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a
lease.
A corporation will issue bonds when
the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan.
A company's capital structure refers to
the mixture of debt and equity used to finance the company.
Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:
a lease payable a lease asset
A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______.
a premium
In a private placement of bonds, bonds may be sold to
a single large investor.
Corporate bonds most often pay interest_____
semiannually
Most corporate bonds pay interest
semiannually
