CH 7 Acct

Calculate the amount of interest (straight basis) on a 2-year loan of $2,000 at a 15 percent interest rate.

$2,000 x 0.15 x 2 = $600

Calculate the effective interest rate (APR) on a 6-month loan of $6,000 at a 10 percent interest rate (discount basis).

10.53% = ($6,000 × 10% × 1/2 / ($6,000 - 300) × 1/2 = 10.53%

Calculate the annual percentage rate on a 1-year loan of $7,000 at a 12 percent interest rate (straight basis).

12%

Suppose a firm has an average income tax rate of 25 percent and issues a 6 percent, long-term debt, then the after-tax cost of debt is _____.

6% × (1 - 25%) = 4.5%

If a firm has an average income tax rate of 25 percent and issues long-term debt with an interest rate of 8 percent, then the after-tax cost of debt is:

8% x (1 - 25%) = 6%

APR

=Interest paid/Money available to use X Time in yrs

Which of the following statements are true regarding how bond prices are quoted?

A bond discount is the excess of the face amount over the market value of the bond. When a bond has a market price that is greater than its face amount, it is trading at a premium. Bond prices are often expressed as a percentage of the bond's face amount.

Which of the following statements are true regarding how bond prices are quoted?

A bond is trading at a discount when its face amount is more than its market value. Corporate bonds are usually issued in denominations of $1,000. A $1,000 face amount bond that has a market value of $980 is priced at 98. When a bond has a market price that is greater than its face amount, it is trading at a premium. Bond prices are often expressed as a percentage of the bond's face amount. A bond discount is the excess of the face amount over the market value of the bond.

Identify the impact of recording the cash received in advance from customers.

Cash increases. Net income is not affected. Current liabilities increase.

Identify the impacts of a short-term borrowing on the financial statements.

Current assets increase Cash increases Current liabilities increase

The entry to record accrued interest in the borrower's books has which of the following effects on the financial statements?

Current liabilities are increased. Expenses are increased. Net income is decreased.

The entry to record a short-term borrowing is:

DR Cash CR Short-Term Debt

The borrower's entry to record the proceeds of a short-term discounted note at the time of borrowing is:

Dr. Cash Dr. Discount on Short-Term Debt Cr. Short-Term Debt

The entry to record accrued interest in the borrower's book is:

Dr. Interest Expense Cr. Interest Payable

Firm A (with no financial leverage) earns an ROI of 10 percent. Firm B also earns an ROI of 10 percent, but its assets are partially financed by debt bearing an interest rate of 15 percent. Which of the following statements about the two firms are correct?

Firm B will have negative financial leverage. Firm B's ROE will be less than Firm A's ROE.

Firm A (with no financial leverage) earns an ROI of 10 percent. Firm B also earns an ROI of 10 percent, but its assets are partially financed by debt bearing an interest rate of 8 percent. Which of the following statements about Firm A and Firm B are correct?

Firm B will have positive financial leverage. Firm B's stockholders will be rewarded for taking the risk of borrowing money at a fixed cost. Firm B's ROE will be greater than Firm A's ROE.

Which of the following statements regarding financial leverage are true?

If a firm does not earn enough to pay the interest on its debt, the creditors can ultimately force the firm into bankruptcy. Financial leverage refers to the difference between ROI and ROE.

Which of the following statements regarding financial leverage are true?

If a firm's ROI exceeds the interest rate of the borrowed funds, then ROE will be greater than ROI. Financial leverage adds risk to the firm because the interest cost of debt is usually a fixed percentage.

straight basis

Interest = Principal X Rate X Time(in yrs)

Assume that 8 percent bonds with a 10-year maturity are issued to investors who desire a 10 percent return on investment. The face value of the bonds is $1,000. When pricing the bonds using the present value of the bond payments, which of the following statements are true? (Check all that apply).

The bonds' annual interest annuity is equal to $80 ($1,000 x 8%). The bonds' maturity amount of $1,000 will be discounted back to present value at the market interest rate of 10 percent.

Assume that 8 percent bonds with a 10-year maturity are issued to investors who desire a 7 percent return on investment. The face value of the bonds is $1,000. In pricing the bonds using the present value of the bond issuance, which of the following statements are true? (Check all that apply).

The bonds' annual interest annuity will be discounted back to present value at the market rate of 7 percent. The bonds will be issued at a premium. The bonds' maturity amount of $1,000 will be discounted back to present value at the market interest rate of 7 percent

With respect to callable bonds, which of the following statements are true?

The issuer usually is required to pay a call premium to the bondholders if the bonds are called. The issuer has the option of calling the bonds before the scheduled maturity date, but is not obligated to do so.

The entry to record an employer's payroll obligation for a payroll period includes:

a credit to Wages Payable (or Accrued Payroll) for the net pay.

The entry to record the accrual of property taxes for the year includes:

a debit to Property Tax Expense. a credit to Property Taxes Payable.

The entry to record an employer's payroll obligation for a payroll period includes:

a debit to Wages Expense for the gross pay.

Other accrued liabilities commonly reported on the balance sheet include:

advertising obligations property taxes payable estimated warranty liabilities

Bond discount:

amortization increases interest expense over the amount actually paid to bondholders. is classified in the balance sheet as a contra account to the Bonds Payable account.

The financial statement effects of an employer's entry to record payroll obligations for a payroll period include:

credits to withholding liabilities. a debit to Wages Expense for the gross pay. a credit to Wages Payable (or Accrued Payroll) for the net pay.

For the (straight/discount) basis of interest calculation, loan is based on the principal amount of the loan but the interest is subtracted from the principal at the beginning of the loan and the difference is made available to the borrower

discount

Bond premium:

is a deferred credit that is amortized to interest expense over the life of a bond. amortization reduces interest expense below the amount actually paid to bondholders.

As accrued liabilities represent expenses that have been incurred but not yet paid, accountants report other accrued liabilities on financial statements to adhere to the _____.

matching principle

discount basis

principal - interest amount

The (straight/discount) basis of interest calculation involves charging interest on the money available to the borrower for the length of time it was borrowed.

straight

The difference between the gross and net methods of recording the accounts payable relates to:

the timing of the recognition of cash discounts.

Current maturities of long-term debt are a current liability representing that portion of long-term debt that:

will be maturing within a year of the balance sheet date.