Chapter 9

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? $2,542. $500. $6,000. $3,042.

$2,542.

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? $3,042. $2,529. $2,555. $2,542.

$2,555. Have to recalculate the new interest rate for the next month because it will now be 6% of the total val - amount paid in first payment

A company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. After the first month's payment, what is the balance of the note? $29,769. $30,723. $29,640. $30,871.

$29,769. sub monthly interest off monthly payment and then subtract that from total

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? $513. $500. $487. $6,000.

$487.

Suppose a company issues $500,000 of 4% bonds, due in 5 years, with interest payable semiannually. The bonds are issued at face amount. What would be the balance of Bonds Payable after the first semi-annual interest payment? $500,000. $510,000. $480,000. $490,000.

$500,000.

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? $500. $3,042. $2,542. $6,000.

$500.

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate the carrying value of the bonds after the first semiannual interest payment. $51,306. $49,000. $51,521. $52,091.

$52,091. Formula??

Suppose a company issues $500,000 of 4% bonds, due in 5 years, with interest payable semiannually. The bonds are issued at face amount. What is the total amount of cash paid to the bond investor over the life of the bond? $100,000. $600,000. $550,000. $500,000.

$600,000.

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate interest expense as of the first semiannual interest payment. $1,000. $375. $785. $1,570.

$785.

The market interest rate of a bond is: A government-issued rate based on general economic conditions. Incorrect The amount of principal to be returned to the bondholder at the maturity date. 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. The rate specified in the bond contract used to calculate the cash payments for interest.

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.

Which of the following is true regarding a company assuming more debt? 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. Assuming more debt reduces leverage. Assuming more debt is always bad for the company. Assuming more debt is always good for the company.

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.

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds' carrying value will be Above or below face amount depending on current market interest rates. Below face amount. At face amount. Above face amount.

At face amount.

Serial bonds are Bonds backed by collateral. Bonds that mature in installments. Bonds the issuer can repurchase at a fixed price. Bonds issued below the face amount.

Bonds that mature in installments

A bond is a formal debt instrument that promises to pay: Multiple ChoicePeriodic interest payments. Both a principal amount at the maturity date and periodic interest payments. A portion of the company's profits each period. A principal amount at the maturity date.

Both a principal amount at the maturity date and periodic interest payments.

Suppose a company issues $500,000 of 4% bonds, due in 5 years, with interest payable semiannually. The bonds are issued at face amount. What would the company record at the time of issuance? Debit Cash $500,000; credit Bonds Payable $400,000; credit Interest Payable $100,000. Debit Cash $400,000; debit Interest Expense $100,000; credit Bonds Payable $500,000. Debit Cash $500,000; credit Bonds Payable $500,000. Debit Cash $500,000; debit Interest Expense $100,000; credit Bonds Payable $500,000; credit Interest Payable $100,000.

Debit Cash $500,000; credit Bonds Payable $500,000. Is this cuz after each interest payment the interest rate is now based on the smaller percent owed? So total interest paid is not 500,000 * .04 * 5yrs

Suppose a company issues $500,000 of 4% bonds, due in 5 years, with interest payable semiannually. The bonds are issued at face amount. What would the company record at the time of the first semi-annual interest payment? Debit Interest Expense $10,000; credit Cash $10,000. Debit Bonds Payable $10,000; credit Cash $10,000. Debit Bonds Payable $20,000; credit Cash $20,000. Debit Interest Expense $20,000; credit Cash $20,000.

Debit Interest Expense $10,000; credit Cash $10,000.

A company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. Which of the following is the current journal entry to record for the first month's payment? Debit Interest Expense $129; debit Notes Payable $1,231; credit Cash $1,360. Debit Interest Expense $68; debit Notes Payable $1,292; credit Cash $1,360. Debit Notes Payable $1,360; credit Cash $1,360. Debit Interest Expense $1,360; credit Cash $1,360.

Debit Interest Expense $129; debit Notes Payable $1,231; credit Cash $1,360.

Which of the following is NOT an advantage of debt financing? The cost of borrowing may be lower than the return on equity. Debt financing often has no maturity date. Interest is tax deductible. The ownership interest of current stockholders is unchanged.

Debt financing often has no maturity date.

If bonds are issued at a premium, over the life of the bonds, the carrying value will: Increase. Decrease. The answer depends on the market interest rate. Stay the same.

Decrease.

When bonds are issued at a premium, what happens to interest expense each period over the life of the bonds? Stay the same. Decrease. Increase. The answer depends on the market interest rate.

Decrease.

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Calculate the issue price of the bonds, assuming a market interest rate of 5%. $52,246. $58,983. $47,835. $47,812.

Formula?? $47,812.

A company needs construction equipment to complete a project over the next 20 months. The equipment costs $10,000. Instead of purchasing the equipment with a 12% note, the company leases the equipment with payments of $300 due at the end of each month. For what amount would the company record the lease liability at the beginning of the lease? $4,586. $6,000. $10,000. $5,414.

Formula??? $5,414.

If bonds are issued at a discount, interest expense will be Higher than cash interest paid. Lower or higher depending on current market interest rates. Lower than cash interest paid. Incorrect Equal to cash interest paid.

Higher than cash interest paid.

If bonds are issued at a discount, over the life of the bonds, the carrying value will: Decrease. Stay the same. Increase. Depend on the current market interest rate.

Increase

If bonds are issued at a discount, over the life of the bonds, interest expense will: Increase. Remain unchanged. Decrease. The effect cannot be determined from the information given.

Increase.

Bonds issued at a premium are: Issued below face value. Issued above face value. Issued at face value. Riskier bonds sold at a bargain price.

Issued above face value.

A company's capital structure refers to: Its mixture of current versus long-term assets. Its mixture of paid-in capital versus retained earnings. Its mixture of liabilities and stockholders' equity. Its mixture of current versus long-term liabilities.

Its mixture of liabilities and stockholders' equity.

An advantage of leasing an asset rather than purchasing the asset is: Lease payments are tax deductible while depreciation on a purchased asset is not. Leases are not reported as liabilities in the balance sheet. Leased assets are more likely to generate additional profits than are purchased assets. Leases typically require less cash upfront to begin using the asset.

Leases typically require less cash upfront to begin using the asset.

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: Gain of $2 million. Gain of $16 million. Gain of $14 million. Loss of $2 million.

Loss of $2 million.

Which of the following definitions describes a term bond? Secured only by the "full faith and credit" of the issuing corporation. Matures on a single date. Matures in installments. Supported by specific assets pledged as collateral by the issuer.

Matures on a single date.

Which of the following is not a primary source of corporate debt financing? Notes. Bonds. Leases. Receivables.

Receivables.

In each succeeding payment on an installment note: The amount that goes to interest expense increases. The amount that goes to interest expense is unchanged. The amount that goes to interest expense decreases. The amounts paid for both interest and principal increase proportionately.

The amount that goes to interest expense decreases.

Bonds issued at face amount will have an issue price equal to: The bonds' principal amount less future interest payments. The bonds' principal amount plus future interest payments. The bonds' interest payments only. The bonds' principal amount only.

The bonds' principal amount only.

Financial leverage is best measured by which of the following ratios? The debt to equity ratio. The return on equity ratio. The times interest earned ratio. The return on assets ratio.

The debt to equity ratio.

Which of the following is true for bonds issued at a discount? The market interest rate is greater than the stated interest rate. The stated interest rate and the market interest rate are unrelated. The stated interest rate and the market interest rate are equal. The stated interest rate is greater than the market interest rate.

The market interest rate is greater than the stated interest rate.

The price of a bond is equal to The present value of the face amount only. The present value of the interest only. The future value of the face amount plus the future value of the stated interest payments. The present value of the face amount plus the present value of the stated interest payments.

The present value of the face amount plus the present value of the stated interest payments.

Which of the following ratios measures a company's ability to pay interest relative to the company's profits? The return on assets ratio. The inventory turnover ratio. The debt to equity ratio. The times interest earned ratio.

The times interest earned ratio.

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

A credit of $5 million to gain on early extinguishment.

Lincoln County retires a $50 million bond issue when the carrying value of the bonds is $48 million, but the market value of the bonds is $54 million. Lincoln County will record the retirement as A credit of $6 million to Gain due to early extinguishment. A debit of $6 million to Loss due to early extinguishment. No gain or loss on retirement. A debit to Cash for $54 million.

A debit of $6 million to Loss due to early extinguishment.

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at A discount. A premium. Face amount. A discount or premium depending on the maturity date.

A premium.

Which of the following is not a primary source of long-term debt financing? Bonds. Accounts payable. Leases. Notes payable.

Accounts payable.

Which of the following typically represents an advantage of leasing over purchasing an asset with an installment note? Leasing typically offers greater flexibility and lower costs in disposing of an asset. All of the answer choices are advantages of leasing. Lease payments often are lower than installment payments. Leasing generally requires less cash upfront.

All of the answer choices are advantages of leasing.

A company leases an office building for 24 months. At the beginning of the lease period, the lessee (user) would: Record a lease for the present value of the 24 lease payments. Record a lease asset. All of the answers are correct. Record a lease liability.

All of the answers are correct.