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Chapter 14 Long-Term Liabilities
MULTIPLE CHOICE QUESTIONS
1)
The legal contract between the issuing corporation and the bondholders is called the bond
indenture.
A)
True
B)
False
2)
One of the similarities of bond and equity financing is that both dividends and equity distribution
payments are tax deductible.
A)
True
B)
False
3)
Interest on bonds is tax deductible.
A)
True
B)
False
4)
The relationship between the market rate of a bond and the rate of return on the borrowed funds
affects the company's return on equity.
A)
True
B)
False
5)
A disadvantage of bond financing over equity financing is the burden on the cash flows of the
company.
A)
True
B)
False
6)
Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more
than one date.
A)
True
B)
False
7)
Debentures always have specific assets of the issuing company pledged as collateral.
A)
True
B)
False
8)
Indenture refers to a bond's legal contract; debenture refers to an unsecured bond.
A)
True
B)
False
9)
Bond market values are expressed as a percent of their par (face) value.
A)
True
B)
False
10)
A bond with a par value of $1,000 trading at 101½ sells for a premium.
A)
True
B)
False
11)
A bond with a par value of $1,000 trading at 97½ sells for a premium.
A)
True
B)
False
12)
Callable bonds have an option exercisable by the issuer to retire them at a stated dollar amount
prior to maturity.
A)
True
B)
False
13)
Callable bonds can be exchanged for a fixed number of shares of the issuing corporation's common
stock.
A)
True
B)
False
14)
A particular feature of callable bonds is that they reduce the bondholder's risk by requiring the
issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds
at maturity.
A)
True
B)
False
15)
Issuers of coupon bonds are not allowed to deduct the interest expense on their tax returns.
A)
True
B)
False
16)
A bond's par value is not necessarily the same as its market value.
A)
True
B)
False
17)
An installment note is an obligation of the issuing company that requires a series of periodic
payments to the lender.
A)
True
B)
False
18)
Payments on an installment note normally include the accrued interest expense plus a portion of the
amount borrowed.
A)
True
B)
False
19)
Bonds and long-term notes are similar in that they are typically transacted with multiple lenders.
A)
True
B)
False
20)
The carrying value of a long-term note is computed as the present value of all remaining future
payments, discounted using the market rate at the time of issuance.
A)
True
B)
False
21)
Mortgage contracts grant the lender the right to be paid from the cash proceeds of the sale of a
borrower's assets identified in the mortgage if the borrower fails to make the required payments.
A)
True
B)
False
22)
Mortgage bonds are backed only by the good faith and credit of the issuing company.
A)
True
B)
False
23)
A basic present value concept is that cash paid or received in the future has less value now than the
same amount of cash today.
A)
True
B)
False
24)
A basic present value concept is that cash paid or received in the future has more value now than
the same amount of cash received today.
A)
True
B)
False
25)
Compounded means that interest during a second period is based on the total amount borrowed
plus the interest accrued in the first period.
A)
True
B)
False
26)
A company borrows $10,000 and issues a 5-year, 6% installment note with interest payable
annually. The factor for the present value of an annuity at 6% for 5 years is 4.2124. The factor for
the present value of a single sum at 6% for 5 years is 0.7473. The amount of the annual payment is
$2,373.94.
A)
True
B)
False
27)
A company borrows $40,000 and issues a 3-year, 10% installment note with interest payable
annually. The factor for the present value of an annuity at 10% for 3 years is 2.4869. The factor for
the present value of a single sum at 10% for 3 years is 0.7513. The amount of the annual payment
is $12,000.
A)
True
B)
False
28)
An annuity is a series of equal payments at equal time intervals.
A)
True
B)
False
29)
The present value of an annuity is equal to the sum of the individual future values for each
payment.
A)
True
B)
False
30)
The factor for the present value of an annuity at 8% for 10 years is 6.7101. This implies that an
annuity of ten $15,000 payments at 8% yields a present value of $2,235.
A)
True
B)
False
31)
The factor for the present value of an annuity for 6 years at 10% is 4.3553. This implies that an
annuity of six $2,000 payments at 10% is the equivalent of $8,710.60 today.
A)
True
B)
False
32)
A lease is a contractual agreement between a lessor and a lessee that grants the lessee the right to
use the asset for a period of time in return for cash payment(s) to the lessor.
A)
True
B)
False
33)
Operating leases are long-term or noncancelable leases in which the lessor transfers substantially
all the risks and rewards of ownership to the lessee.
A)
True
B)
False
34)
An advantage of lease financing is the lack of an immediate large cash payment for the leased
asset.
A)
True
B)
False
35)
A disadvantage of an operating lease is the inability to deduct rental payments in computing
taxable income.
A)
True
B)
False
36)
A pension plan is a contractual agreement between an employer and its employees to provide
benefits to employees after they retire.
A)
True
B)
False
37)
A bond is an issuer's written promise to pay an amount identified as the par value of the bond along
with periodic interest payments. Normal 0 false false false EN-IN X-NONE X-NONE
A)
True
B)
False
38)
An advantage of bond financing is that issuing bonds does not affect owner control.
A)
True
B)
False
39)
Periodic interest payments on bonds are determined by multiplying the par value of the bond by the
contract rate.
A)
True
B)
False
40)
The contract rate of interest is the rate that borrowers are willing to pay and lenders are willing to
accept for a particular bond and its risk level.
A)
True
B)
False
41)
Return on equity increases when the expected rate of return from the acquired assets is higher than
the interest rate on the debt issued to finance the acquired assets.
A)
True
B)
False
42)
The use of debt financing ensures an increase in return on equity.
A)
True
B)
False
43)
Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the
corporation.
A)
True
B)
False
44)
Collateral from unsecured loans may be sold to offset the loan obligation if the loan is in default.
A)
True
B)
False
45)
A company's ability to issue unsecured debt depends on its credit standing.
A)
True
B)
False
46)
A lessee has substantially all of the benefits and risks of ownership in an operating lease.
A)
True
B)
False
47)
A company with a low level of liabilities in relation to stockholders' equity is likely to have a very
high debt-to-equity ratio.
A)
True
B)
False
48)
The debt-to-equity ratio is calculated by dividing total stockholders' equity by total liabilities.
A)
True
B)
False
49)
The debt-to-equity ratio enables financial statement users to assess the risk of a company's
financing structure.
A)
True
B)
False
50)
A company has assets of $350,000 and total liabilities of $200,000. Its debt-to-equity ratio is 0.6.
A)
True
B)
False
51)
A company's debt-to-equity ratio was 1.0 at the end of Year 1. By the end of Year 2, it had
increased to 1.7. Since the ratio increased from Year 1 to Year 2, the degree of risk in the firm's
financing structure decreased during Year 2.
A)
True
B)
False
52)
The contract rate on previously issued bonds changes as the market rate of interest changes.
A)
True
B)
False
53)
The market rate for bonds is generally higher when the time period to maturity is longer due to the
risk of adverse events occurring over the time period.
A)
True
B)
False
54)
A 10-year bond issue with a $100,000 par value, 8% annual contract rate, with interest payable
semiannually means that the issuer must repay $100,000 at the end of 10 years and make 20
semiannual interest payments of $4,000 each.
A)
True
B)
False
55)
When the contract rate on a bond issue is less than the market rate, the bonds sell at a discount.
A)
True
B)
False
56)
When the contract rate is above the market rate, a bond sells at a discount.
A)
True
B)
False
57)
A discount on bonds payable occurs when a company issues bonds with an issue price less than par
value.
A)
True
B)
False
58)
The carrying (book) value of a bond at the time it is issued is always equal to its par value.
A)
True
B)
False
59)
The carrying (book) value of a bond payable is the par value of the bonds plus any discount or
minus any premium.
A)
True
B)
False
60)
On January 1, a company issued a $500,000, 10%, 8-year bond payable, and received proceeds of
$473,845. Interest is payable each June 30 and December 31. The total interest expense on the
bond over its eight-year life is $400,000.
A)
True
B)
False
