Chapter 9 Smart Books

Which of the following financial ratios provides information about the income generated per dollar of assets?

Return on assets

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

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:

debit lease asset $25,000; credit lease payable $25,000

Loans requiring periodic payments of interest and principle are referred to as ___notes.

installments

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by

interest expense

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(n)

lease

Improved cash flows is a common advantage of acquiring equipment through ___

leasing

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 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

___ bonds require payment of the full principle amount of the bond at the end of the loan term.

Term

In a private placement of bonds, bonds may be sold to

a single large investor.

Financing with ___requires borrowing, whereas financing with requires ___ issuing shares of stock

debt; equity

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

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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.

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long-term debt

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased.

Corporate bonds most often pay interest

semiannually

Callable bonds can be redeemed at the choice of

the bond issuer.

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

Debt

___ bonds are retired when the bondholder exchanges them for the issuing company's stock.

convertible

Which of the following are common characteristics or provisions of bonds?

convertible callable secured or unsecured term or serial

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

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ___ risk.

financial

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

secured

___ bonds are supported by a specific asset the issuer pledges as collateral.

secured

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n)___ bond.

unsecured

Most bonds issued today are ______.

unsecured

Identify two ratios commonly used to assess a company's financial risk.

Debt to equity ratio Times interest earned ratio

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

Convertible bonds allow the lender to convert each bond into:

common stock

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as

term bonds

___financing refers to borrowing money from creditors.

Debt

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 end of the period The cash paid each payment period The carrying value of the note at the beginning of the period

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?

The carrying value of the note at the end of the period; The decrease in the carrying value of the note; The cash paid each payment period; Interest expense based on the beginning period carrying value and the effective rate of the loan

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:

a lease asset a lease payable

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.

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

The journal entry to recognize the signing of an installment notes payable includes:

Debit Cash; Credit Notes Payable

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

False

Which of the following are possible benefits of leasing an asset rather than purchasing an asset?

Improvement in cash flows Protection against declining asset value Lower periodic payments on the asset

Which of the following is true regarding a debenture bond?

It is secured by the faith and credit standing of the issuer.

Which of the following are correct regarding bonds?

They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.

At the beginning of a lease period, the lessee records

a lease asset and lease payable for the present value of the lease payments.

Periodic payments on installment notes typically include

a portion that reflects interest.; a portion that reduces the outstanding loan balance.

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.

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.

A(n)___ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

lease

In the U.S., the most popular method for financing corporate long-term assets is:

leasing

___ has grown into the most popular method of external financing of corporate assets in America.

leasing

___has grown into the most popular method of external financing of corporate assets in America.

leasing

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ___ placement.

private

The return on assets measures the amount of ___ generated for each dollar of assets.

profit

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?

$48,880

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:

$8600

The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.

higher