Accounting 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 for interest expense for the first full month?

$500

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:

A credit of $5 million to gain on early extinguishment

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds' carrying value will be

At the face amount

The issue price of a bond is calculated as:

The present value of the bond's face amount plus the present value of its periodic interest payments

If bonds are issued at a discount, over the life of the bonds, interest expense will:

Increase

If bonds are issued at a discount, over the life of the bonds, the carrying value will:

Increase

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

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

-Debt financing often has no maturity date

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

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at:

A premium

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

Accounts payable

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

All of the answers are correct

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will:

Both decrease

When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds?

Carrying value and interest expense remain unchanged

The cash paid for interest on bonds payable is calculated as:

Face amount times the stated interest rate

If bonds are issued at a discount, interest expense will be:

Higher than cash interest paid

Bonds issued at a premium are:

Issued above face value

Bonds issued at a discount are:

Issued below face value

A company's capital structure refers to:

Its mixture of liabilities and stockholder's equity

An advantage of leasing an asset rather than purchasing the asset is:

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:

Loss of $2 million

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

Matures in installments

Convertible bonds:

Provide potential benefits to both the lender and the borrower

Callable bonds:

Provide potential benefits to the issuer

Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is less common?

Secured and serial

In each succeeding payment on an installment note:

The amount that goes to interest expense decreases

Financial leverage is best measured by which of the following ratios?

The debt to equity ratio