ch 7 sb
Calculate the amount of interest (straight basis) on a 2-year loan of $2,000 at a 15 percent interest rate.
2k X 15% x 2=$600
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 statements are true regarding how bond prices are quoted?
Corporate bonds are usually issued in denominations of $1,000. A bond is trading at a discount when its face amount is more than its market value. A $1,000 face amount bond that has a market value of $980 is priced at 98.
Identify the impacts of a short-term borrowing on the financial statements.
Current liabilities increase Current assets increase Cash increases
The entry to record a short-term borrowing is:
DR Cash CR Short-Term Debt
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
The entry to record the pay-off of bonds at maturity is:
Dr. Bonds Payable Cr. Cash
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 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
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
Which of the following financial statement effects occur when a bond discount is amortized? (Check all that apply).
Expenses are increased and net income is decreased. The net carrying value of Bonds Payable is increased.
The entry to record accrued interest in the borrower's books has which of the following effects on the financial statements?
Expenses are increased. Current liabilities are increased. Net income is decreased.
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 (operating/financial) leverage.
Financial
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 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 ROE will be greater than Firm A's ROE. Firm B's stockholders will be rewarded for taking the risk of borrowing money at a fixed cost.
Identify the correct statements about a registered bond.
For a registered bond, interest payments are mailed to the bondholder on the basis as called for in the indenture. For a registered bond, the name and address of the owner of the bond are known to the issuer.
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.
Which of the following conditions must be met before a contingent liability is recorded on a firm's balance sheet?
It must be probable that the loss will be confirmed by a future transaction or event.
The (stated/market) interest rate, adjusted for compounding frequency, is the discount rate used in the present value calculations for bond pricing.
Market
Identify a correct mode of repayment of term bonds and serial bonds at the time of maturity.
Term bonds require a lump-sum repayment of the face amount, but serial bonds are repaid in installments.
A company should record a contingent liability on its balance sheet only when __
The amount of loss is reasonably estimable
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' maturity amount of $1,000 will be discounted back to present value at the market interest rate of 10 percent. The bonds' annual interest annuity is equal to $80 ($1,000 x 8%).
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' 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. The bonds' annual interest annuity will be discounted back to present value at the market rate of 7 percent.
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? (Check all that apply).
The net carrying value of Bonds Payable is decreased. Expenses are decreased and net income is increased.
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. Reason: Bonds are usually issued in denominations of $1,000.
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. Revenues increase. Liabilities decrease.
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 financial statement effects of an employer's entry to record payroll obligations for a payroll period include:
a debit to Wages Expense for the gross pay. a credit to Wages Payable (or Accrued Payroll) for the net pay. credits to withholding liabilities.
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 financial statement effects of an early retirement of bonds usually include:
a decrease to noncurrent liabilities. the recognition of a loss (or possibly a gain) on the retirement of bonds.
Debt financing usually has _____.
a lower cost to a firm as compared to equity financing
Deferred tax liabilities arise because of the _____.
accounting process of matching revenues and expenses difference between a company's book income and taxable income
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 borrower's entry to record the proceeds of a short-term discounted note at the time of borrowing would include: (Check all that apply).
an increase to Short-Term Debt for the principal amount of the note. an increase to Cash for the amount of proceeds (the principal amount of the note less the amount of interest on the note).
The financial statement effects of recording a firm's accrued property taxes for the year 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.
Deferred tax liabilities:
are one of the most significant liabilities shown on the balance sheet for many firms. are provided for temporary differences between income tax and financial statement recognition of revenues and expenses. are normally long term in nature.
Callable bonds will be called when the market interest rate is sufficiently (above/below) the stated rate being paid on the bonds.
below
As market interest rates rise, bond prices (rise/fall).
fall
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.
Bond discount:
is a deferred charge that is amortized to interest expense over the life of the bond. represents additional interest expense to be recognized over the life of the bond.
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.
Accounts payable are normally shown:
on the balance sheet as a current liability, but not reduced by anticipated cash discounts.
A debenture is secured _____.
only by the general credit of the issuer
Other accrued liabilities commonly reported on the balance sheet include:
property taxes payable advertising obligations estimated warranty liabilities
All bonds issued nowadays are in the form of (registered/coupon) bonds.
registered
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.
Bond discount:
s classified in the balance sheet as a contra account to the Bonds Payable account. amortization increases interest expense over the amount actually paid to bondholders.
The (stated/market) interest rate, adjusted for compounding frequency, is used to calculate the amount of interest paid for each payment period of a bond's life.
stated
The amount of discount or premium amortization on bonds is the same each year under the (straight-line/effective) interest method.
straight-line
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.
When bonds are called, the (bondholder/issuer) usually has to pay a call (discount/premium).
Blank 1: issuer Blank 2: premium
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.
Blank 1: market
(straight/discount) basis of interest calculation involves charging interest on the money available to the borrower for the length of time it was borrowed.
Blank 1: straight
At the maturity date, a lump-sum repayment of the face amount of a (term/serial) bond is made, whereas the face amount of a (term/serial) bond is repaid in installments over time.
Blank 1: term Blank 2: serial
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
Calculate the amount of interest (discount 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 (discount 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 effective interest rate (APR) on a 1-year loan of $2,000 at a 15 percent interest rate (discount basis).
$300 / (($2,000 - $300) x 1) = 17.6%
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%
Identify the bond that is secured by a pledge of securities or other intangible property.
A collateral trust bond
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
The employer's Wages Payable or Accrued Payroll for a payroll period represents employees' (gross/net) pay.
Net
Identify the impact of recording the cash received in advance from customers.
Net income is not affected. Cash increases. Current liabilities increase.
Identify the frequently listed other noncurrent liabilities. (Check all that apply).
Obligations to pension plans Estimated liabilities under lawsuits
Identify an item that is commonly included with noncurrent liabilities.
Product Warranties
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 _____.
Reason: 6% × (1 - 25%) = 4.5%
Calculate the annual percentage rate on a 1-year loan of $7,000 at a 12 percent interest rate (straight basis).
Reason: = ($7,000 × 12% × 1) / ($7,000 × (1)) = 12%
Calculate the effective interest rate (APR) on a 6-month loan of $6,000 at a 10 percent interest rate (discount basis).
Reason: = ($6,000 × 10% × (6 / 12)) / (($6,000 - 300) × (6 / 12)) = 10.53%
