Chapter 9

__bonds are supported by a specific asset the issuer pledges as collateral.

secure

__has grown into the most popular method of external financing of corporate assets in America.

leasing

The return on assets measures the amount of __generated for each dollar of assets. (Enter only one word.)

income

A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n) maturable asset. common stock. bond. obligation payment.

bond

A corporation that wishes to borrow from the general public rather than a bank will issue

bonds

__financing refers to borrowing money from creditors.

debt

Financing with __requires borrowing, whereas financing with __requires issuing shares of stock. (Enter one word per blank.)

debt equity

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as

term bonds

Convertible bonds allow the lender to convert each bond into: preferred stock secured bonds common stock

common stock

The two types of financing are

debt financing. equity financing.

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are: convertible unsecured secured

secured

Loans requiring periodic payments of interest and principle are referred to as __notes.

installment

Identify two ratios commonly used to assess a company's financial risk. Debt to equity ratio Current ratio Equity yield ratio Times interest earned ratio Gross profit ratio

Debt to equity ratio Times interest earned ratio

Periodic payments on installment notes typically include (Select all that apply.) -an increase in stockholders' equity -installment fees. -a portion that reflects interest. -a portion that reduces the outstanding loan balance.

a portion that reflects interest. a portion that reduces the outstanding loan balance.

Periodic payments on installment notes typically include (Select all that apply.) a portion that reflects interest. a portion that reduces the outstanding loan balance. installment fees. an increase in stockholders' equity

a portion that reflects interest. a portion that reduces the outstanding loan balance.

You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0 Company B Company A Company C Company D

Company D

__bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

Which of the following are typically shown in an amortization schedule related to an installment notes payable? (Select all that apply.) The carrying value of the note at the end of the period The cash paid each payment period The carrying value of the note at the beginning of the period Interest expense based on the end of period carrying value and current market conditions

The carrying value of the note at the end of the period The cash paid each payment period The carrying value of the note at the beginning of the period

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal? (Select all that apply.) The cash paid each payment period The carrying value of the note at the end of the period The increase in the carrying value of the note Interest expense based on the beginning period carrying value and the effective rate of the loan The decrease in the carrying value of the note

The cash paid each payment period The carrying value of the note at the end of the period Interest expense based on the beginning period carrying value and the effective rate of the loan The decrease in the carrying value of the note

Which of the following is true regarding a debenture bond? It is secured by the faith and credit standing of the issuer. It is secured by an outside third party. It is secured by the issuer's long-term assets.

It is secured by the faith and credit standing of the issuer.

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records: a lease asset a note payable a lease expense a lease payable interest expense

a lease asset a lease payable

At the beginning of a lease period, the lessee records lease expense for the current period payment amount. lease expense for the full lease amount. a lease asset and lease payable for the market value of the lease. a lease asset and lease payable for the present value of the lease payments.

a lease asset and lease payable for the present value of the lease payments.

In a private placement of bonds, bonds may be sold to the general public. a single large investor. an underwriter who sells it to individual investors.

a single large investor

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of

financial risk

Which of the following provides the clearest indication of an organization's ability to pay current and future interest. low earnings relative to interest expense high earnings relative to interest expense low earnings relative to dividends high earnings relative to dividends

high earnings relative to interest expense

In the U.S., the most popular method for financing corporate long-term assets is: outright purchase exchange of similar assets leasing

leasing

Which of the following financial ratios provides information about the income generated per dollar of assets? Current ratio Return on stockholders' equity Return on assets Debt to asset ratio

return on assets

Most corporate bonds pay interest monthly. semiannually. annually quarterly

semiannually

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing: current assets long-term liabilities net income current liabilities

long-term liabilities

Which of the following are common characteristics or provisions of bonds? perpetual or periodic secured or unsecured free or redeemable callable convertible

secured or unsecured callable convertible term or serial

The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the return on assets ratio times interest earned ratio return on equity ratio interest expense ratio

times interest earned ratio

The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the times interest earned ratio return on assets ratio interest expense ratio return on equity ratio

times interest earned ratio

A(n)__ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)

lease

Improved cash flows is a common advantage of acquiring equipment through .

leasing

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for: $5,000 $1,000 $13,000

$13,000

Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records: debit lease asset $50,000; credit lease payable $50,000 debit lease expense $50,000; credit cash $50,000 debit lease payable $50,000; credit lease asset $50,000 no journal entry is required at inception of the lease debit cash $50,000; credit lease expense $50,000

debit lease asset $50,000; credit lease payable $50,000

The times interest earned ratio provides an indication of how successful a company is at borrowing money. how many times greater earnings are than interest expense. how much income is generated using borrowed money. a company's interest rate relative to income.

how many times greater earnings are than interest expense.

A common reason for redeeming a bond prior to its maturity date is that market interest rates decreased. market interest rates increased. the market price of bonds decreased.

market interest rates decreased.

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880.

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be: $8,600 $8,000 $10,000

$8,600

__bonds require payment of the full principle amount of the bond at the end of the loan term.

term

Callable bonds can be redeemed at the choice of

the bond issuer

The debt to equity ratio is calculated as long-term debt divided by total stockholders' equity. noncurrent liabilities divided by current liabilities + stockholders' equity. current liabilities divided by total stockholders' equity. total liabilities divided by total stockholders' equity.

total liabilities divided by total stockholders' equity.

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

debt

XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company? $5,000 current note payable; $45,000 long-term note payable $0 current note payable; $50,000 long-term note payable $0 current note payable; $45,000 long-term note payable $5,000 current note payable; $0 long-term note payable

$5,000 current note payable; $45,000 long-term note payable

The journal entry to recognize the signing of an installment notes payable includes: Credit Cash Debit Cash Credit Notes Payable Debit Notes Payable

Debit Cash Credit Notes Payable

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt. True False

False

Which of the following are possible benefits of leasing an asset rather than purchasing an asset? Higher debt to asset ratios Improvement in cash flows Lower periodic payments on the asset Protection against declining asset value

Improvement in cash flows Lower periodic payments on the asset Protection against declining asset value

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a: debit to Notes Payable for $24,000 debit to Prepaid Interest for $2,400 credit to Notes Payable for $24,000 credit to Notes Payable for $26,400

credit to Notes Payable for $24,000

The higher a company's earnings relative to its interest expense, the more likely it is that it will be able to pay its

current and future interest payments.

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n) bond.

debenture or unsecured

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to interest expense for $5,120. interest expense for $4,000. notes payable for 5,120. notes payable for $1,120.

interest expense for $4,000. notes payable for $1,120.

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n)__ placement.

private