Chapter 09 Long-Term Liabilities Answer Key
True / False Questions
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.
As a company’s level of debt increases, bankruptcy risk increases.
9-2
4.
Companies that are believed to have high bankruptcy risk generally receive higher credit
ratings and pay a lower interest rate for borrowing.
5.
Bonds are the most common form of corporate debt.
6.
A private placement is when a company chooses to sell the debt securities directly to a
single investor.
7.
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.
8.
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.
9.
Operating leases are contractual agreements where the lessor owns the asset and the
lessee simply uses the asset temporarily.
9-4
10.
Operating leases occur when the lessee essentially buys an asset and borrows the money
through a lease to pay for the asset.
11.
Secured bonds are backed by the federal government.
12.
Unsecured bonds are not backed by a specific asset.
13.
Term bonds require payments in installments over a series of years.
14.
Serial bonds require payment of the full principal amount of the bond at a single maturity
date.
15.
A callable bond allows the borrower to repay the bonds before their scheduled maturity
date at a specified call price.
16.
Convertible bonds allow the investor to convert each bond into a specified number of
shares of common stock.
17.
We can calculate the issue price of a bond as the face amount plus the total periodic
interest payments.
18.
The market interest rate represents the true interest rate used by investors to value a
company’s bond issue.
9-7
19.
The stated interest rate is the rate quoted in the bond contract used to calculate the cash
payments for interest.
20.
The market interest rate does not change over time.
21.
The stated interest rate does not change over time.
9-8
22.
As a company’s default risk increases, investors demand a higher market interest rate on
their bond investments.
23.
The lower the market interest rate, the lower the bond issue price will be.
24.
Bonds issued below face amount are said to be issued at a discount.
9-9
25.
A premium occurs when the issue price of a bond is above its face amount.
26.
The amount reported on the balance sheet for bonds payable is equal to the carrying value
at the balance sheet date.
27.
When bonds are issued at a discount (below face amount), the carrying value and the
corresponding interest expense increase over time.
9-10
28.
When bonds are issued at a premium (above face amount), the carrying value and the
corresponding interest expense increase over time.
29.
Interest expense is calculated as the carrying value times the market rate.
30.
The cash payment each period is calculated as the carrying value times the market rate.
9-11
31.
An amortization schedule provides a summary of the cash interest payments, interest
expense, and changes in carrying value for each period.
32.
For bonds issued at a premium, the difference between interest expense and the cash
paid increases the carrying value of the bonds.
33.
At the maturity date, the carrying value will equal the face amount of the bond.
9-12
34.
The market value of bonds moves in the opposite direction of interest rates.
35.
When an issuer retires debt of any type before its scheduled maturity date, the transaction
is an early extinguishment of debt.
36.
Gains/losses on the early extinguishment of debt are reported as part of operating income
in the income statement.
9-13
37.
Losses have the effect of reducing net income, while gains increase net income.
38.
A gain or loss is recorded on bonds retired at maturity.
39.
The debt to equity ratio measures a company’s risk and is calculated as total liabilities
divided by stockholders’ equity.
9-14
40.
Leverage enables a company to earn a higher return using debt than without debt.
41.
Return on assets is calculated as net income divided by the ending balance for total
assets.
42.
The times interest earned ratio compares interest expense with income available to pay
interest charges.
9-15
Multiple Choice Questions
43.
Which of the following is
not
a primary source of corporate debt financing?
44.
Which of the following is the primary source of corporate equity financing?
9-16
45.
Profits generated by the company are a(n):
46.
The mixture of liabilities and stockholders’ equity a business uses is called its:
9-17
47.
Which of the following is
not
a true statement?
48.
In each succeeding payment on an installment note:
9-18
49.
For a five-year installment note signed on January 1, 2016, at which of the following dates
would the carrying value be the lowest?
50.
For a five-year installment note signed on January 1, 2016, at which of the following dates
would the carrying value be the highest?
9-19
51.
In each succeeding payment on an installment note:
52.
The entry to record a monthly payment on an installment note such as a car loan:
53.
How does the amortization schedule for an installment note such as a car loan differ from
an amortization schedule for bonds?
9-20
54.
Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2018.
What amount will be recorded for interest expense for the first payment on January 31,
2018?