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
