Financial Accounting, 5e (Spiceland)
Chapter 9 Long-Term Liabilities
1) The mixture of liabilities and stockholders’ equity a business uses is called its capital structure.
2) Interest expense incurred when borrowing money, as well as dividends paid to stockholders,
are tax-deductible.
3) Debt financing refers to borrowing money from creditors.
4) Equity financing refers to profits generated by operations.
5) Three primary sources of long-term debt financing are notes, leases, and bonds.
6) Monthly installment payments on a note payable include both an amount that represents
interest and an amount that represents a reduction of the outstanding loan balance.
7) Car loans and home loans that require monthly payments are sometimes referred to as
installment notes.
8) With each monthly payment of an installment note payable, the portion assigned to interest
expense increases.
9) The amount of interest expense recorded with each monthly payment of an installment note
payable equals the note’s monthly interest rate times the note’s carrying value at the end of the
previous month.
10) A lease is a contractual arrangement by which the lessor (owner) provides the lessee (user)
the right to use an asset for a specified period of time.
11) An advantage of leasing an asset rather than buying is that leasing improves cash flows by
reducing the upfront cash needed to use an asset.
12) An advantage of buying an asset rather than leasing is that installment payments associated
with buying often are lower than lease payments.
13) Signing a lease for equipment has no effect on the lessee’s balance sheet.
14) Leasing typically does not protect the lessee (user) against the risk of declining asset values.
15) At the beginning of the lease term, a lease is recorded for the sum of all future lease
payments.
16) A private placement is when a company chooses to sell the debt securities directly to a single
investor.
17) Secured bonds are backed by the federal government.
18) Unsecured bonds are not backed by a specific asset.
19) Term bonds require payments in installments over a series of years.
20) Serial bonds require payment of the full principal amount of the bond at a single maturity
date.
21) Callable bonds allow the borrower to repay the bonds before their scheduled maturity date at
a specified call price.
22) Convertible bonds allow the investor to convert each bond into a specified number of shares
of common stock.
23) We can calculate the issue price of a bond as the face amount plus the total periodic interest
payments.
24) The market interest rate represents the true interest rate used by investors to value a
company’s bond issue.
25) The stated interest rate is the rate quoted in the bond contract used to calculate the cash
payments for interest.
26) The market interest rate does not change over time.
27) The stated interest rate does not change over time.
28) As a company’s default risk increases, investors demand a higher market interest rate on their
bond investments.
29) The lower the market interest rate, the lower the bond issue price will be.
30) Bonds issued below face amount are said to be issued at a discount.
31) A premium occurs when the issue price of a bond is above its face amount.
32) The amount reported in the balance sheet for bonds payable is equal to the carrying value at
the balance sheet date.
33) When bonds are issued at a discount (below face amount), the carrying value and the
corresponding interest expense increase over time.
34) When bonds are issued at a premium (above face amount), the carrying value and the
corresponding interest expense increase over time.
35) Interest expense is calculated as the carrying value times the market rate.
36) The cash payment each period is calculated as the carrying value times the market rate.
37) An amortization schedule provides a summary of the cash interest payments, interest
expense, and changes in carrying value for each period.
38) For bonds issued at a premium, the difference between interest expense and the cash paid
increases the carrying value of the bonds.
39) At the maturity date, the carrying value will equal the face amount of the bond.
40) The market value of bonds moves in the opposite direction of interest rates.
41) When an issuer retires debt of any type before its scheduled maturity date, the transaction is
an early extinguishment of debt.
42) Gains/losses on the early extinguishment of debt are reported as part of operating income in
the income statement.
43) Losses have the effect of reducing net income, while gains increase net income.
44) A gain or loss is recorded on bonds retired at maturity.
45) The debt to equity ratio measures a company’s risk and is calculated as total liabilities
divided by stockholders’ equity.
46) Leverage enables a company to earn a higher return using debt than without debt.
47) Return on assets is calculated as net income divided by the ending balance for total assets.
48) The times interest earned ratio compares interest expense with income available to pay
interest charges.
49) Which of the following is not a primary source of corporate debt financing?
A) Bonds Payable.
B) Common Stock.
C) Leases.
D) Notes Payable.
50) Which of the following is the primary source of corporate equity financing?
A) Bonds Payable.
B) Common Stock.
C) Leases.
D) Notes Payable.
51) Profits generated by the company are a(n):
A) Source of external financing.
B) Source of internal financing.
C) Liability.
D) Asset.
52) The mixture of liabilities and stockholders’ equity a business uses is called its:
A) Bond contract.
B) Carrying value.
C) Capital structure.
D) Accounting equation.
53) Which of the following is not a true statement?
A) Companies that are believed to have high bankruptcy risk generally receive low credit ratings
and must pay a higher interest rate for borrowing.
B) As a company’s level of debt increases, the risk of bankruptcy increases.
C) Interest expense incurred when borrowing money, as well as dividends paid to stockholders,
are both tax-deductible.
D) The mixture of liabilities and stockholders’ equity a business uses is called its capital
structure.
54) In each succeeding payment on an installment note:
A) The amount that goes to decreasing the carrying value of the note increases.
B) The amount that goes to decreasing the carrying value of the note decreases.
C) The amount that goes to decreasing the carrying value of the note is unchanged.
D) The amounts paid for both interest and principal increase proportionately.
55) In each succeeding payment on an installment note:
A) The amount of interest expense increases.
B) The amount of interest expense decreases.
C) The amount of interest expense is unchanged.
D) The amounts paid for both interest and principal increase proportionately.
56) For a ten-year installment note, the portion of the periodic installment payment that
represents interest in the third year is:
A) The same as in the fourth year.
B) The same as in the first year.
C) Less than in the fourth year.
D) More than in the fourth year.
57) Which of the following describes monthly installment payments of a note payable?
A) The monthly payments equal interest expense plus the reduction of the note’s carrying value.
B) The amount of interest expense recorded each month increases over time.
C) The amount of the reduction in the note’s carrying value recorded each month decreases over
time.
D) All of the other answer choices are correct.
58) Babble Co. signs a five-year installment note on January 1, 2021. At which of the following
dates would the carrying value be the highest?
A) August 1, 2021
B) November 30, 2023
C) April 30, 2024
D) December 31, 2022
59) Babble Co. signs a five-year installment note on January 1, 2021. At which of the following
dates would the carrying value be the lowest?
A) August 1, 2021
B) November 30, 2023
C) April 30, 2024
D) December 31, 2022
60) The entry to record a monthly payment on an installment note such as a car loan:
A) Increases expenses, decreases liabilities, and decreases assets.
B) Increases expenses, increases liabilities, and increases assets.
C) Increases expenses, decreases liabilities, and increases assets.
D) Increases expenses, increases liabilities, and decreases assets.
61) How does the amortization schedule for an installment note such as a car loan differ from an
amortization schedule for bonds?
A) The final carrying value is not zero in either amortization schedule.
B) The final carrying value is zero in an amortization schedule for bonds.
C) The final carrying value is zero in both amortization schedules.
D) The final carrying value is zero in an amortization schedule for an installment note.
62) Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2021.
What amount will be recorded for interest expense for the first month’s payment on January 31,
2021?
A) $625
B) $125
C) $7,500
D) $1,000
63) Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2021.
If the monthly payment is $2,416.60, by how much will the carrying value decrease when the
first payment is made on January 31, 2021?
A) $1,791.60
B) $625.00
C) $2,416.60
D) $1,000.60
64) A company issues a $200,000, 5%, six-year note on January 1, 2021. What amount will be
recorded for interest expense for the first month’s payment on January 31, 2021?
A) $1,000.00
B) $138.89
C) $833.33
D) $694.44
65) A company issues a $200,000, 5%, six-year note on January 1, 2021. If the monthly payment
is $3,220.99, by how much will the carrying value decrease when the first month’s payment is
made on January 31, 2021?
A) $4,054.32
B) $2,387.66
C) $3,220.99
D) $833.33
66) A company issues a $200,000, 5%, six-year note on January 1, 2021. If the monthly payment
is $3,220.99, what is the note’s carrying value after the first month’s payment is made on January
31, 2021?
A) $197,612.34
B) $200,000.00
C) $196,779.01
D) $199,166.67
67) On January 1, 2021, Red, Inc. borrowed cash by issuing a $500,000, 5-year note that
specified 6% interest to be paid on December 31 of each year and the $500,000 to be paid at
maturity. If the note had instead been an installment note to be paid in four equal payments at the
end of each year beginning December 31, 2021, which of the following would be true?
A) The effective interest rate would have been higher.
B) The annual cash payment would have been less.
C) The first year’s interest expense would have been higher.
D) The second year’s interest expense would have been less.
68) Which of the following represents an advantage of leasing rather than buying an asset with
an installment note?
A) Leasing may offer protection against the risk of declining asset values.
B) Lease payments often are lower than installment payments.
C) Leasing offers flexibility and lower costs when disposing of an asset.
D) All of the other answer choices are correct.
69) Which of the following is the number one method of external financing by U.S. companies?
A) Issuing installment notes.
B) Leasing.
C) Issuing bonds.
D) Borrowing from banks.