172) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a
face value of $100,000. Interest payments are made semi-annually. The market rate for this type
of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a
financial calculator or Excel)
A) $104,265.
B) $95,842.
C) $71,906.
D) $100,000.
173) Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a
face value of $100,000. Interest payments are made semi-annually. The market rate for this type
of bond is 5%. What is the issue price of the bond (rounded to nearest whole dollar)? (Use a
financial calculator or Excel)
A) $102,323.
B) $84,557.
C) $104,376.
D) $100,000.
174) The balance sheet of Sub America reports total assets of $400,000 and $450,000 at the
beginning and end of the year, respectively. The return on assets for the year is 10%. What is
Sub America’s net income for the year?
A) $42,500.
B) $45,000.
C) $4,250,000.
D) $85,000.
175) 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) 10%
B) 11%
C) 9%
D) 25%
176) A company reports net income of $250,000. The return on assets for the year is 20%. What
is the company’s average total assets for the year?
A) $1,250,000
B) $1,000,000
C) $1,500,000
D) $250,000
177) A company’s balance sheet reports stockholders’ equity of $400,000, total liabilities of
$600,000, and total assets of $1,000,000. What is the company’s debt to equity ratio?
A) 1.5
B) 0.66
C) 2.5
D) 1.0
178) A company’s balance sheet reports stockholders’ equity of $800,000. The debt to equity
ratio is 2.5. What is the amount of the company’s total liabilities?
A) $2,000,000
B) $320,000
C) $1,000,000
D) $800,000
179) A company’s balance sheet reports total liabilities of $2,000,000. The debt to equity ratio is
2.5. What is the company’s stockholders’ equity?
A) $800,000
B) $320,000
C) $1,000,000
D) $2,000,000
180) Financial leverage is best measured by which of the following ratios?
A) The debt to equity ratio.
B) The return on equity ratio.
C) The times interest earned ratio.
D) The return on assets ratio.
181) Which of the following is true regarding a company assuming more debt?
A) Assuming more debt is always bad for the company.
B) Assuming more debt is always good for the company.
C) Assuming more debt can be good for the company as long as they earn a return in excess of
the rate charged on the borrowed funds.
D) Assuming more debt reduces leverage.
182) Which of the following is not a true statement?
A) The debt to equity ratio measures a company’s risk and is calculated as total liabilities divided
by stockholders’ equity.
B) Leverage enables a company to earn a higher return using debt than without debt.
C) Return on assets is calculated as net income divided by the ending balance for total assets.
D) The times interest earned ratio compares interest expense with income available to pay
interest charges.
183) The times interest earned ratio is calculated as
A) Interest expense/Net income.
B) Net income/Interest expense.
C) (Net income + interest expense + tax expense)/Interest expense.
D) Interest expense/(Net income + interest expense + tax expense).
184) Selected financial data for Channel Co. is provided below:
($ in millions)
Sales
$
50,000
Interest expense
1,000
Tax expense
2,000
Net income
7,000
Total assets (beginning of year)
54,000
Total assets (end of year)
60,000
Total liabilities (end of year)
24,000
Total stockholders’ equity (end of year)
36,000
What is the debt to equity ratio for Channel Co.?
A) 0.67.
B) 0.40.
C) 1.50.
D) 0.60.
185) Selected financial data for Channel Co. is provided below:
($ in millions)
Sales
$
50,000
Interest expense
1,000
Tax expense
2,000
Net income
7,000
Total assets (beginning of year)
52,000
Total assets (end of year)
60,000
Total liabilities (end of year)
24,000
Total stockholders’ equity (end of year)
36,000
What is the return on assets for Channel Co.?
A) 11.7%.
B) 13.5%.
C) 12.5%.
D) 17.9%.
88
186) Selected financial data for Channel Co. is provided below:
($ in millions)
Sales
$
50,000
Interest expense
1,000
Tax expense
2,000
Net income
7,000
Total assets (beginning of year)
54,000
Total assets (end of year)
60,000
Total liabilities (end of year)
24,000
Total stockholders’ equity (end of year)
36,000
What is the times interest earned ratio for Channel Co.?
A) 10.0 times.
B) 7.0 times.
C) 4.0 times.
D) 8.5 times.
187) Selected financial data for Surfer Co. is provided below:
($ in millions)
Sales
$
940,000
Interest expense
3,000
Tax expense
21,000
Net income
54,000
Total assets (beginning of year)
900,000
Total assets (end of year)
820,000
Total liabilities (end of year)
600,000
Total stockholders’ equity (end of year)
220,000
What is the debt to equity ratio for Surfer Co.?
A) 0.37.
B) 0.73.
C) 2.73.
D) 3.73.
90
188) Selected financial data for Surfer Co. is provided below:
($ in millions)
Sales
$
940,000
Interest expense
3,000
Tax expense
21,000
Net income
54,000
Total assets (beginning of year)
900,000
Total assets (end of year)
820,000
Total liabilities (end of year)
600,000
Total stockholders’ equity (end of year)
220,000
What is the return on assets for Surfer Co.?
A) 6.0%.
B) 6.9%.
C) 6.6%.
D) 6.3%.
189) Selected financial data for Surfer Co. is provided below:
($ in millions)
Sales
$
940,000
Interest expense
3,000
Tax expense
21,000
Net income
54,000
Total assets (beginning of year)
900,000
Total assets (end of year)
820,000
Total liabilities (end of year)
600,000
Total stockholders’ equity (end of year)
220,000
What is the times interest earned ratio for Company Surfer Co.?
A) 21.0 times.
B) 26.0 times.
C) 18.0 times.
D) 25.0 times.
92
Match the following:
A) Present value of payments
B) Discount
C) Amortization schedule
D) Times interest earned ratio
E) Sinking fund
F) Premium
G) Market interest rate
H) Lease
I) Stated interest rate
J) Debt to equity ratio
190) The rate quoted in the bond contract used to calculate the cash payments for interest.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
191) Arrangement by which an asset’s owner provides another party the right to use the asset for
a specified period of time.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
93
192) Total liabilities divided by total stockholders’ equity; measure a company’s risk.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
193) The true interest rate used by investors to value a bond.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
194) The issue price is below its face amount.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
94
195) Amount to record a lease asset and lease liability at the beginning of the lease period.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
196) Provides a summary of the cash interest payments, interest expense, and changes in
carrying value for debt instruments.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
197) The issue price is above its face amount.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
95
198) Ratio that compares interest expense with income available to pay those charges.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
199) An investment fund used to set aside money to be used to pay debts as they come due.
Difficulty: 2 Medium
Topic: Leases; Types of Bonds; Recording Bonds Payable – Discount; Recording Bonds Payable
– Premium; Pricing a Bond – Discount; Pricing a Bond – Premium; Analysis – Debt to Equity
Ratio; Analysis – Times Interest Earned Ratio
Learning Objective: 09-03 Understand how leases are recorded.; 09-04 Identify the
characteristics of bonds.; 09-05 Record the issuance of bonds and related interest; 09-07
Calculate the issue price of a bond.; 09-08 Assess the impact of long-term debt on risk and
return.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
96
Match the following:
A) Private placement.
B) Bond issue costs.
C) Secured bond.
D) Term bond.
E) Unsecured bond.
F) Convertible bond.
G) Serial bond.
H) Callable bond.
200) Matures in installments.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
201) Allows the issuer to pay off the bonds early at a fixed price.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
202) Allows the investor to transfer each bond into shares of common stock.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
203) Includes underwriting, legal, accounting, registration, and printing fees.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
97
204) Sale of debt securities directly to a single investor.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
205) Supported by specific assets pledged as collateral by the issuer.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
206) Secured only by the “full faith and credit” of the issuing corporation.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
207) Matures on a single date.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
98
Match the following:
A) Secured bond.
B) Term bond.
C) Unsecured bond.
D) Serial bond.
208) Matures in installments.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
209) Matures on a single date.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
210) Supported by specific assets pledged as collateral by the issuer.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
211) Secured only by the “full faith and credit” of the issuing corporation.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
99
Match the following:
A) Bond issue costs.
B) Callable bond.
C) Private placement.
D) Convertible bond.
212) Allows the issuer to pay off the bonds early at a fixed price.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
213) Allows the investor to transfer each bond into shares of common stock.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
214) Includes underwriting, legal, accounting, registration, and printing fees.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
215) Sale of debt securities directly to a single investor.
Difficulty: 2 Medium
Topic: Types of Bonds
Learning Objective: 09-04 Identify the characteristics of bonds.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
100
Match the following:
A) Bonds issued at a premium
B) Bonds issued at a discount
C) Market interest rate
D) Stated interest rate
E) Bonds issued at face amount
216) The true interest rate used by investors to value a bond.
Difficulty: 2 Medium
Topic: Recording Bonds Payable – Face Amount; Recording Bonds Payable – Discount;
Recording Bonds Payable – Premium; Pricing a Bond – Face Amount; Pricing a Bond – Discount;
Pricing a Bond – Premium
Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate
the issue price of a bond
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
217) The stated interest rate is more than the market interest rate.
Difficulty: 2 Medium
Topic: Recording Bonds Payable – Face Amount; Recording Bonds Payable – Discount;
Recording Bonds Payable – Premium; Pricing a Bond – Face Amount; Pricing a Bond – Discount;
Pricing a Bond – Premium
Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate
the issue price of a bond
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
218) The stated interest rate equals the market interest rate.
Difficulty: 2 Medium
Topic: Recording Bonds Payable – Face Amount; Recording Bonds Payable – Discount;
Recording Bonds Payable – Premium; Pricing a Bond – Face Amount; Pricing a Bond – Discount;
Pricing a Bond – Premium
Learning Objective: 09-05 Record the issuance of bonds and related interest.; 09-07 Calculate
the issue price of a bond
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Critical Thinking