126.
Which of the following statements is correct?
127.
Tony Hawk’s Adventure (THA) issued callable bonds on January 1, 2018. THA’s accountant
has projected the following amortization schedule from issuance until maturity:
Date
Cash
Paid
Interest
Expense
Increase
in
Carrying
Value
Carrying
Value
1/1/2018
$194,758
6/30/2018
$7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA buys back the bonds for $196,000 immediately after the interest payment on
12/31/2018 and retires them. What gain or loss, if any, would THA record on this date?
128.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on
December 31 each year. X2’s accountant has projected the following amortization
schedule from issuance until maturity:
Date
Cash
Paid
Interest
Expense
Decrease
in
Carrying
Value
Carrying
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
X2 buys back the bonds for $103,000 immediately after the interest payment on
12/31/2019 and retires them. What gain or loss, if any, would X2 record on this date?
129.
When bonds are retired before their maturity date:
130.
The Viper retires a $40 million bond issue when the carrying value of the bonds is $42
million, but the market value of the bonds is $36 million. The entry to record the retirement
will include:
131.
The Raptor retires a $20 million bond issue when the carrying value of the bonds is $18
million, but the market value of the bonds is $15 million. The entry to record the retirement
will include:
132.
The Titan retires a $20 million bond issue when the carrying value of the bonds is $18
million, but the market value of the bonds is $23 million. The entry to record the retirement
will include:
133.
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?
134.
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?
135.
Prowler reports net income of $250,000. The return on assets for the year is 20%. What is
Prowler’s average total assets for the year?
136.
The balance sheet of Montezuma reports stockholders’ equity of $400,000, total liabilities
of $600,000, and total assets of $1,000,000. What is Montezuma’s debt to equity ratio?
137.
The balance sheet of Gatekeeper reports stockholders’ equity of $800,000. The debt to
equity ratio is 2.5. What is Gatekeeper’s total liabilities?
138.
The balance sheet of Gatekeeper reports total liabilities of $2,000,000. The debt to equity
ratio is 2.5. What is Gatekeeper’s stockholders’ equity?
139.
Financial leverage is best measured by which of the following ratios?
140.
Which of the following is true regarding a company assuming more debt?
141.
Which of the following is
not
a true statement?
142.
The times interest earned ratio is calculated as
143.
Selected financial data for Company A is provided below:
($ in millions)
Company A
Sales
$66,176
Interest expense
676
Tax expense
1,362
Net income
$2,620
What is the times interest earned ratio for Company A?
9-72
144.
Selected financial data for Company B is provided below:
($ in millions)
Company B
Sales
$47,220
Interest expense
287
Tax expense
1,042
Net income
$1,783
What is the times interest earned ratio for Company B?
Matching Questions
145.
Match the following
1. Times interest
The rate quoted in the bond contract used to calculate the cash
2. Debt to equity
The lessor owns the asset and the lessee simply uses the asset
3. Amortization
Total liabilities divided by total stockholders’ equity; measure a
5. Sinking fund
The issue price is below its face amount.
4
6. Market interest
Provides a summary of the cash interest payments, interest
The lessee essentially buys an asset and borrows the money
8. Operating
9. Stated interest
Ratio that compares interest expense with income available to
An investment fund used to set aside money to be used to pay
146.
Match the following
2. Bond issue
3. Private
Allows the investor to transfer each bond into shares of common
4. Secured bond.
Includes underwriting, legal, accounting, registration, and
5. Callable bond.
6. Convertible
Supported by specific assets pledged as collateral by the issuer.
Secured only by the “full faith and credit” of the issuing
8. Unsecured
147.
Match the following
1. Secured bond.
3. Unsecured
Secured only by the “full faith and credit” of the issuing
148.
Match the following
1. Private
2. Callable bond.
Allows the investor to transfer each bond into shares of common
3. Bond issue
Includes underwriting, legal, accounting, registration, and printing
4. Convertible
149.
Match the following
1. Market interest
2. Stated interest
3. Bonds issued at
4. Bonds issued at
5. Bonds issued at
The rate quoted in the bond contract used to calculate the cash
9-76
Essay Questions
150.
Frontier City is trying to decide between the following two alternatives to finance its new
$10 million roller coaster:
a. Issue $10 million of 6% bonds at face amount.
b. Issue one million shares of common stock for $10 per share.
Issue Bonds
Issue Stock
Operating income
$5,000,000
$5,000,000
Interest expense (bonds only)
Income before tax
Income tax expense (30%)
Net income
$
$
# of shares
3,000,000
4,000,000
Earnings per share (Net income/# of shares)
$
$
Operating income
Interest expense (bonds only)
Income before tax
Income tax expense (30%)
Net income
$3,080,000
$3,500,000
# of shares
3,000,000
4,000,000
Earnings per share (Net income/# of shares)
Assuming bonds or shares of stock are issued at the beginning of the year, complete the
income statement listed above for each alternative. Which alternative results in the
highest earnings per share?
151.
On January 1, 2018, Julee Enterprises borrows $30,000 to purchase a new Toyota
Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due
at the end of each month with the first installment due on January 31, 2018. Record the
issuance of the note payable and the first two monthly payments.
152.
Valentino’s Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each
$1,000 bond is convertible into twenty-five shares of common stock. The current market
price of Valentino’s stock is $35 per share.
1. Explain why Valentino‘s might choose to issue convertible bonds.
2. Explain why investors might choose to purchase Valentino’s convertible bonds.
153.
Stealth Fitness Center issues 7%, 10-year bonds with a face amount of $200,000. The
market interest rate for bonds of similar risk and maturity is 8%. Interest is paid
semiannually. At what price will the bonds be issued?