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Exam 9: Long-Term Liabilities

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Question 71

Multiple Choice

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An amortization schedule for a bond issued at a premium:

A) Has a carrying value that increases over time.
B) Is contained in the balance sheet.
C) Is a schedule that reflects the changes in bonds payable over its term to maturity.
D) All of the other answers are correct.

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

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Question 72

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Bonds are the most common form of corporate debt.

A) True
B) False

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Question 73

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What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

What are the potential risks and rewards of carrying additional debt? How does additional debt affect a company's return to investors?

Which of the following is not a true statement?

How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?

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?

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

An amortization schedule for a bond issued at a discount:

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

Which of the following is not a reason why some companies lease rather than buy?

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

A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?

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

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

An amortization schedule provides a summary of the cash interest payments, interest expense, and changes in carrying value for each period.

Return on assets is calculated as net income divided by the ending balance for total assets.

Ordinarily, the proceeds from the sale of a bond issue will be equal to:

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