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Exam 9: Long-Term Liabilities

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Question 1

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Which of the following is not a true statement?

A) The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.
B) Leverage enables a company to earn a higher return using debt than without debt.
C) Return on assets is calculated as net income divided by the ending balance for total assets.

D) All of the above
E) A) and B)

Correct Answer

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C

Question 2

Multiple Choice

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Which of the following leases is essentially the purchase of an asset with debt financing?

A) An operating lease.
B) A capital lease.
C) Both an operating and a capital lease.

D) All of the above
E) A) and B)

Correct Answer

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B

Question 3

Multiple Choice

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When bonds are issued at a discount and the effective interest method is used for amortization,at each interest payment date,the interest expense:

The balance sheet of Montezuma reports total assets of $900,000 and $1,100,000 at the beginning and end of the year,respectively.The net income for the year is $100,000.What is Montezuma's return on assets?

A bond issue with a face amount of $500,000 bears interest at the rate of 10%.The current market rate of interest is also 10%.These bonds will sell at a price that is:

When bonds are issued at a discount (below face amount),the carrying value and the corresponding interest expense increase over time.

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

The rate quoted on the bond contract used to calculate the cash payments for interest is called the:

Tony Hawk's Adventure (THA) issued callable bonds on January 1,2018.THA's accountant has projected the following amortization schedule from issuance until maturity: The THA bonds have a life of: $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Increase in } \\\text { Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 194,758 \\\hline 6 / 30 / 2018 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\\hline 12 / 31 / 2018 & 7,000 & 7,822 & 822 & 196,370 \\\hline 6 / 30 / 2019 & 7,000 & 7,865 & 865 & 197,225 \\\hline 12 / 31 / 2019 & 7,000 & 7,889 & 889 & 198,114 \\\hline 6 / 30 / 2020 & 7,000 & 7,925 & 925 & 199,039 \\\hline 12 / 31 / 2020 & 7,000 & 7,961 & 961 & 200,000 \\\hline\end{array}$

Convertible bonds:

The times interest earned ratio is calculated as

As a company's default risk increases,investors demand a higher market interest rate on their bond investments.

The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

Discount-Mart issues $10 million in bonds on January 1,2018.The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year.Below is a partial bond amortization schedule for the bonds: What is the carrying value of the bonds as of December 31,2019? $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Increase } \\\text { in } \\\text { Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 8,640,967 \\\hline 6 / 30 / 2018 & \$ 300,000 & \$ 345,639 & \$ 45,639 & 8,686,606 \\\hline 12 / 31 / 2018 & 300,000 & 347,464 & 47,464 & 8,734,070 \\\hline 6 / 30/2019 & 300,000 & 349,363 & 49,363 & 8,783,433 \\\hline 12 / 31 / 2019 & 300,000 & 351,337 & 51,337 & 8,834,770 \\\hline\end{array}$

The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million,but the market value of the bonds is $23 million.The entry to record the retirement will include:

X2 issued callable bonds on January 1,2018.The bonds pay interest annually on December 31 each year.X2's accountant has projected the following amortization schedule from issuance until maturity: The X2 bonds have a life of: $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Decrease } \\\text { in Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 104,212 \\\hline 12 / 31 / 2018 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\\hline 12 / 31 / 2019 & 7,000 & 6,208 & 792 & 102,673 \\\hline 12 / 31 / 2020 & 7,000 & 6,160 & 840 & 101,833 \\\hline 12 / 31 / 2021 & 7,000 & 6,110 & 890 & 100,943 \\\hline 12 / 31 / 2022 & 7,000 & 6,057 & 943 & 100,000 \\\hline\end{array}$

A gain or loss is recorded on bonds retired at maturity.No gain or loss is recorded on bonds retired at maturity,as the carrying value at maturity is equal to the face amount of the bond.

The carrying value,using the effective interest method,would increase each year:

At the maturity date,the carrying value will equal the face amount of the bond.

The price of a bond is equal to: