Accounting I Ch.10 - SmartBook

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the principal balance of the loan on January 1, Year 2 was .

[-] $166,581

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. The amount of interest expense incurred in Year 1 was .

[-] $18,000

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the portion of the principal balance repaid during Year 1 was .

[-] $33,419

If a company has net income of $340,000, interest expense of $10,000, and income tax expense of $180,000, how much is its EBIT?

[-] $530,000

Walt Company issued $100,000 of bonds at face value. The bonds carried an 9 percent annual interest rate. Assuming Walt has an effective income tax rate of 30 percent, the company's after tax interest cost of debt equals .

[-] $6,300

Walt Company issued $100,000 of bonds at face value. The bonds carried an 9 percent annual interest rate. Assuming Walt has an effective income tax rate of 30 percent, the company's after tax interest rate is .

[-] 6.3%

Which of the following statements are true? [-] Bond interest is normally paid only on the maturity date. [-] A bond certificate describes the issuer's obligation to pay interest and repay the principal. [-] The amount due at maturity is called the face value of the bond. [-] The interest rate on a bond normally fluctuates from month to month.

[-] A bond certificate describes the issuer's obligation to pay interest and repay the principal. [-] The amount due at maturity is called the face value of the bond.

The highest rating (lowest risk) that a company issuing bonds can receive is .

[-] AAA

Issuing a bond to borrow money affects the . [-] Balance sheet [-] Statement of cash flows [-] Income statement

[-] Balance sheet [-] Statement of cash flows

Repaying a bond at maturity affects the . [-] Balance sheet [-] Statement of cash flows [-] Income statement

[-] Balance sheet [-] Statement of cash flows

True or false: A higher return on assets can by obtained by using debt financing rather than equity financing.

[-] False

Which of the following entities does not publish ratings of the risk of default as guides to bond investors?

[-] Federal Government

Which of the following is deductible for tax purposes?

[-] Interest expense only

True or false: Companies may choose to issue bonds in order to lower their interest costs.

[-] True

A payment on an installment loan .

[-] affects all financial statements

Borrowing money by issuing a bond causes assets .

[-] and liabilities to increase

When a company makes a cash payment for interest on a bond that was issued at face value, ______. [-] assets decrease [-] expenses increase [-] liabilities decrease [-] cash outflows from financing activities increase

[-] assets decrease [-] expenses increase

Issuing companies have the option to redeem (pay off) the debt before the maturity date with bonds.

[-] callable

When a company makes a cash payment for interest on a bond that was issued at face value, ______ decreases. [-] cash [-] bonds payable [-] cash flow from operating activities [-] cash flow from investing activities [-] retained earnings

[-] cash [-] cash flow from operating activities [-] retained earnings

To reduce the risk that they won't get paid, lenders frequently require borrowers to pledge designated assets as for loans.

[-] collateral

Recognizing a cash payment for interest on a line of credit . [-] decreases assets [-] increases cash outflow for financing activities [-] decreases liabilities [-] decreases net income

[-] decreases assets [-] decreases net income

When compared to other creditors, the holder of an unsubordinated debenture has a(n) priority claim.

[-] equal

The call price of a callable bond normally the face value of the bond.

[-] exceeds

When a company can increase earnings by borrowing money at a lower percentage than they can invest the proceeds, occurs.

[-] financial leverage

The spread between the rate of interest paid on borrowing and the rate of interest earned on investments is a company's .

[-] financial; leverage

Issuing an installment note for cash is recorded as a cash flow from activities.

[-] financing

A payment on an installment loan will be shown in the activities sections of the statement of cash flows. [-] investing [-] financing [-] operating

[-] financing [-] operating

Payments on installment loans . [-] are made only on the maturity date [-] normally have fluctuating interest rates [-] include a payment for interest [-] include a repayment of a portion of the principal balance

[-] include a payment for interest [-] include a repayment of a portion of the principal balance

In order to avoid the effects of a company's financing strategy on ratio analysis the numerator in the return on assets ratio should be .

[-] income before interest and taxes

Issuing an installment note in exchange for cash (select all that apply): [-] decreases assets [-] increases assets [-] does not affect liabilities [-] decreases liabilities [-] does not affect equity [-] increases equity [-] increases liabilities [-] does not affect assets [-] decreases equity

[-] increases assets [-] does not affect equity [-] increases liabilities

Loans that require payments of principal and interest at regular intervals are called .

[-] installment notes

A line of credit:

[-] is classified as a short-term liability.

A line of credit . [-] is generally classified as a long-term liability [-] is repaid only on the maturity date [-] is normally renewable on a one year term [-] normally has fluctuating interest rates.

[-] is normally renewable on a one year term [-] normally has fluctuating interest rates.

When a company increases the amount borrowed on a line of credit, net income and net cash flow from activities increases.

[-] is not affected, financing

A line of credit . [-] normally has fluctuating interest rates. [-] is repaid only on the maturity date [-] is generally classified as a long-term liability [-] is normally renewable on a one year term

[-] is repaid only on the maturity date [-] is generally classified as a long-term liability

The seller of a bond is called the and the buyer of a bond is called the .

[-] issuer; bondholder

Restrictive covenants designed to provide protection for the return of the principal balance of a loan include . [-] limiting salary increases [-] restrictions on hiring of new employees [-] restricting additional borrowing [-] limiting dividend payments

[-] limiting salary increases [-] restricting additional borrowing [-] limiting dividend payments

A company may borrow funds one month and make a partial repayment the next under the terms of a(n) or .

[-] line; credit

Loans that enable companies to borrow or repay funds as needed are called .

[-] lines of credit

When compared to other creditors, the holder of a subordinated debenture has a(n) priority claim.

[-] lower

A company experienced an event that caused assets, liabilities and cash flow from financing activities to decrease, but had no effect on net income. This could have been due to .

[-] paying the principal balance of a bond at maturity

Until its maturity, the liability for a term bond issued at face value .

[-] remains constant and the liability for an installment note decreases

Over a 5-year term, interest expense for a term bond issued at face and interest expense for an installment note .

[-] remains constant; decreases

All other things being equal, using debt financing instead of financing with equity will retained earnings.

[-] results in a higher level of

A mortgage bonds is a common type of bond.

[-] secured

Bonds that mature at specified intervals throughout the life of the total issue are called bonds.

[-] serial

To ensure there is enough cash available at maturity to pay off the debt, a bond agreement may require the issuer to make regular payment into a(n) fund.

[-] sinking

To ensure there is enough cash available at maturity to pay off the debt, a bond agreement may require the issuer to make regular payment into a(n) .

[-] sinking; fund

Most bonds require the issuer to make cash interest payments based on a(n) interest rate.

[-] stated

Bonds that mature on a specified date in the future are called bonds.

[-] term

Bond obligations normally .

[-] have longer terms to maturity than bank notes