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 amount of interest (straight basis) on a 6-month loan of $2,000 at a 15 percent interest rate.
$2,000 x 0.15 x 6/12 = $150
Calculate the annual percentage rate on a 1-year loan of $7,000 at a 12 percent interest rate (straight basis).
12%
Calculate the annual percentage rate on a 6-month loan of $5,000 at a 15 percent interest rate (straight basis).
15%
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 _____.
4.5 percent
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%
What term is sometimes used to refer to the carrying value of a payable bond?
Book value
Which of the following are impacts of short-term borrowing on financial statements?
Cash increases Current assets increase Current liabilities increase
Which of the following statements are true regarding how bond prices are quoted?
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. A bond is trading at a discount when its face amount is more than its market value.
Which of the following financial statement effects occur when a bond interest payment is made? Assume that the bond interest payment amount had been previously accrued in full. (Check all that apply).
Current assets are decreased. Current liabilities are decreased.
Which of the following financial statement effects occur when bond interest is accrued? (Check all that apply).
Current liabilities are increased. Expenses are increased and net income is decreased.
Identify the impact of recording the cash received in advance from customers.
Current liabilities increase. Cash increases. Net income is not affected.
The entry to record a short-term borrowing is:
DR Cash CR Short-Term Debt
The entry to record the pay-off of bonds at maturity is:
Dr. Bonds Payable Cr. Cash
The journal entry that would normally be made by an issuing company upon the early retirement of bonds (with unamortized bond discount remaining) would be:
Dr. Bonds Payable Dr. Loss on Retirement of Bonds Cr. Cash Cr. Discount on Bonds Payable
The entry to record the accrual of income taxes when an increase in the Deferred Income Tax Liability account is required is:
Dr. Income Tax Expense Cr. Income Taxes Payable Cr. Deferred Tax Liabilities
The entry to record accrued interest in the borrower's book is:
Dr. Interest Expense Cr. Interest Payable
Which of the following are frequently listed as other noncurrent liabilities?
Estimated liabilities under lawsuits Obligations to pension plans
Which of the following statements regarding financial leverage are true?
Financial leverage refers to the difference between ROI and ROE. If a firm does not earn enough to pay the interest on its debt, the creditors can ultimately force the firm into bankruptcy.
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's ROE will be less than Firm A's ROE. Firm B will have negative financial leverage.
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's stockholders will be rewarded for taking the risk of borrowing money at a fixed cost. Firm B will have positive financial leverage. 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.
Which of the following effects would occur when the accrual of income taxes requires an increase in the Deferred Income Tax Liability account?
Income Tax Expense will be debited. Deferred Tax Liabilities will be credited.
As a firm increases in size and acquires more depreciable assets, what happens to the difference between book and tax depreciation?
It grows with each passing year.
What happens to a bond's value at its maturity date?
Its carrying value is equal to its face amount.
The entry to record accrued interest in the borrower's books has which of the following effects on the financial statements?
Net income is decreased. Current liabilities are increased. Expenses are increased.
Identify an item that is commonly included with noncurrent liabilities.
Product warranties
The _________ basis of interest calculation involves charging interest on the money available to the borrower for the length of time it was borrowed.
Straight
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?
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?
The bonds' annual interest annuity will be discounted back to present value at the market rate of 7 percent. The bonds' maturity amount of $1,000 will be discounted back to present value at the market interest rate of 7 percent. The bonds will be issued at a premium.
What happens when a firm's income tax rates do not increase relative to its depreciation deductions?
The firm's deferred income tax liability will increase over time.
With respect to callable bonds, which of the following statements are true?
The issuer has the option of calling the bonds before the scheduled maturity date, but is not obligated to do so. The issuer usually is required to pay a call premium to the bondholders if the bonds are called.
Which of the following financial statement effects occur when a bond premium is amortized?
The net carrying value of Bonds Payable is decreased. Expenses are decreased and net income is increased.
Which of the following financial statement effects occur when a bond discount is amortized?
The net carrying value of Bonds Payable is increased. Expenses are increased and net income is decreased.
How do lenders expect to be repaid when issuing a working capital loan?
Through the sale of inventory
True or false: The determination of a contingent liability depends on one or more future events.
True
Which of the following statements are true regarding how bond prices are quoted?
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.
What does a short-term loan's maturity date specify?
When the loan must be repaid
Identify the impact of allocation of unearned revenue to the fiscal year in which the product is delivered and the revenue is earned.
Working capital increases. Liabilities decrease. Revenues increase.
The financial statement effects of the retirement of discount bonds or premium bonds at maturity include:
a decrease in assets. a decrease in noncurrent liabilities.
The entry to record actual warranty costs in the year in which the warranty is honored includes:
a decrease to current liabilities.
Debt financing usually has ______
a lower cost to a firm as compared to equity financing
Debt financing usually has ______.
a lower cost to a firm as compared to equity financing
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.
Bond premium:
amortization reduces interest expense below the amount actually paid to bondholders. is a deferred credit that is amortized to interest expense over the life of a bond.
The financial statement effects of the accrual of estimated warranty liability in the year in which products are sold include:
an increase to expenses and a decrease to net income. an increase to current liabilities and no effect on cash.
The entry to record the estimated warranty liability in the year in which the product is sold includes:
an increase to expenses.
Callable bonds will be called when the market interest rate is sufficiently (above/below) the stated rate being paid on the bonds.
below
Potential claims on a company's resources arising from such things as pending litigation, environmental hazards, casualty losses to property, and product warranties are referred to as (callable/contingent/convertible) liabilities.
contingent
For the _______ basis of interest calculation, the 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
The amount of discount or premium amortization on bonds is the smallest in the first year and increases in each subsequent year under the (straight-line/effective) interest method.
effective
The difference between the rate of return earned on assets (ROI) and the rate of return earned on stockholders' equity (ROE) is referred to as _____ leverage.
financial
The employer's Wages Expense for a payroll period represents the employees' (gross/net) pay.
gross
Bond Premium
has the opposite effect on a bond's carrying value than does a bond discount. represents a reduction in interest expense to be recognized over the life of a bond.
Current maturities of long-term debt are reported
in the current liability section but separately from short-term debt
One of the key advantages of issuing debt as opposed to common stock to raise additional funds is that:
interest expense is deductible in calculating taxable income, whereas dividends are not tax deductible.
When bonds are called, the (bondholder/issuer) usually has to pay a call (discount/premium).
issuer / premium
The (stated/market) interest rate, adjusted for compounding frequency, is the discount rate used in the present value calculations for bond pricing.
market
There is usually a time lag between the establishment of the interest rate to be printed on the face of the bond and the actual issue date. During this time, (stated/market) interest rates fluctuate, causing the proceeds of the bond to be more than the face amount.
market
Bonds are often issued at a premium or discount largely because of:
market interest rate fluctuations that occur from the time the stated interest rate is established until the bonds are issued.
The employer's Wages Payable or Accrued Payroll for a payroll period represents employees' (gross/net) pay.
net
Accounts payable are normally shown:
on the balance sheet as a current liability, but not reduced by anticipated cash discounts.
Bond discount:
represents additional interest expense to be recognized over the life of the bond. is a deferred charge that is amortized to interest expense over the life of the bond.
The financial statement effects of an early retirement of bonds usually include:
retirement of any unamortized premium or discount associated with the retired bonds. a decrease to assets.
As market interest rates fall, bond prices (rise/fall).
rise
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.
