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Exam 9: Long-Term Liabilities

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Question 1

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Presented below is a partial amortization schedule for Premium Foods: $\begin{array}{ccccc}(1)&(2)&(3)&(4)&(5)\\ & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Period }& \text { Paid }& \text { Expense }&\text { Carrying Value }& \text { Value }\\\text { Issue date } & & & & 85,951 \\1 & \$ 2,800 & \$ 2,579 & \$ 221 & 85,730 \\2 & 2,800 & 2,572 & 228 & 85,958\end{array}$ 1.Record the bond issue. 2.Record the first interest payment.

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Question 2

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X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{lllll} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 10 & & & & \$ 104,212 \\12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\\12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \\12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \\12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000\end{array}$ -What is the annual stated interest rate on the bonds?

A) 3%.
B) 3.5%.
C) 6%.
D) 7%.

E) C) and D)
F) B) and D)

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D

Question 3

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Two leading home improvement chains in the United States are Home Depot and Lowes.Selected financial data for these two close competitors are as follows: $\begin{array}{lrr}(\$ \text { in millions) } & \text { Home Depot } & \text { Lowes } \\\text { Total assets } & \$ 40,877 & \$ 33,005 \\\text { Total liabilities } & 21,484 & 13,936 \\\text { Total stockholders' equity } & 19,393 & 19,069\\\\\text { Sales } & \$ 66,176 & \$ 47,220 \\\text { Interest expense } & 676 & 287 \\\text { Tax expense } & 1,362 & 1,042 \\\text { Net income } & 2,620 & 1,783\end{array}$ 1.Calculate the debt to equity ratio for Home Depot and Lowes.Which company has the higher ratio? 2.Calculate the times interest earned ratio for Home Depot and Lowes.Which company is better able to meet interest payments as they become due?

Which of the following is not a true statement?

X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{lllll} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 10 & & & & \$ 104,212 \\12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\\12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \\12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \\12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000\end{array}$ -X2 issued the bonds:

For a bond issue that sells for more than the bond face amount,the stated interest rate is:

Term bonds require payments in installments over a series of years.

The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity.

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

An amortization schedule for a bond issued at a premium:

The cash payment each period is calculated as the carrying value times the market rate.

Explain how each of the columns in an amortization schedule is calculated,assuming the bonds are issued at a discount.How is the amortization schedule different if bonds are issued at a premium?

Interest expense is calculated as the carrying value times the market rate.

Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a lower interest rate for borrowing.

A $500,000 bond issue sold for $510,000.Therefore,the bonds:

Samson Enterprises issued a ten-year,$20 million bond with a 10% interest rate for $19,500,000.The entry to record the bond issuance would have what effect on the financial statements?

The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest.

A gain or loss is recorded on bonds retired at maturity.

Why do some companies issue bonds rather than borrow money directly from a bank?

Which of the following is not a true statement?