5) On OCTOBER 31, 2011, Bondable, Inc. issued $20,000 of 10-year, 6% bonds at 100. The
bonds pay interest ANNUALLY on October 31. On its income statement for the year ended
DECEMBER 31, 2011, the year the bonds were issued, Bondable will show Interest expense of
________.
A) $0
B) $200
C) $1,200
D) $120
6) On OCTOBER 31, 2011, Bondable, Inc. issued $20,000 of 10-year, 6% bonds at 100. The
bonds pay interest ANNUALLY on October 31. On its statement of cash flows for the year
ended DECEMBER 31, 2011, Bondable will show Cash paid for interest of ________.
A) $0
B) $(200) in the cash flows from financing activities section of the statement
C) $(1,200) in the cash flows from operating activities section of the statement
D) $(120) in the cash flows from operating activities section of the statement
7) On OCTOBER 31, 2011, Bondable, Inc. issued $20,000 of 10-year, 6% bonds at 100. The
bonds pay interest ANNUALLY on October 31. Which of the following will appear on
Bondable’s balance sheet at December 31, 2011?
A) Bonds payable $18,800
B) Bonds payable $20,000
C) Bonds payable $21,200
D) Interest expense $1,200
8) On NOVEMBER 30, 2011, Just in Thyme, Inc. issued $10,000 of 20-year, 9% bonds at 100.
The bonds pay interest SEMIANNUALLY on May 31 and November 30. On its income
statement for the year ended DECEMBER 31, 2011, the year the bonds were issued, Just in
Thyme will show Interest expense of ________.
A) $0
B) $900
C) $450
D) $75
9) On NOVEMBER 30, 2011, Just in Thyme, Inc. issued $10,000 of 20-year, 9% bonds at 100.
The bonds pay interest SEMIANNUALLY on May 31 and November 30. On its statement of
cash flows for the year ended DECEMBER 31, 2011, Just in Thyme will show Cash paid for
interest of ________.
A) $0
B) $(75) in the cash flows from financing activities section of the statement
C) $(450) in the cash flows from operating activities section of the statement
D) $(900) in the cash flows from operating activities section of the statement
10) On NOVEMBER 30, 2011, Just in Thyme, Inc. issued $10,000 of 20-year, 9% bonds at 100.
The bonds pay interest SEMIANNUALLY on May 31 and November 30. Which of the
following will appear on Just in Thyme’s balance sheet at December 31, 2011?
A) Bonds payable $10,900
B) Bonds payable $10,000
C) Bonds payable $9,100
D) Interest expense $900
11) The adjusting entry to record the amount of interest owed on a bond affects how many of the
financial statements?
A) one
B) two
C) three
D) four
12) If a bond is sold at a premium, the carrying value reported on the balance sheet in subsequent
years ________.
A) stays the same each year
B) increases each year
C) decreases each year
D) changes every year as the market rate of interest changes
13) If a bond is sold at a discount, the carrying value reported on the balance sheet in subsequent
years ________.
A) stays the same each year
B) increases each year
C) decreases each year
D) changes every year as the market rate of interest changes
14) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. On its balance
sheet at December 31, 2011, Nadir will show bonds payable of $1,000,000 ________.
A) minus the unamortized discount
B) plus the unamortized discount
C) minus the unamortized premium
D) plus the unamortized premium
15) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. Nadir uses the
effective interest method of amortization. On its income statement for the year ended December
31, 2011, Nadir will show interest expense of ________.
A) exactly $60,000
B) more than $60,000
C) less than $60,000
D) The answer cannot be determined without knowing the price for which the bonds were sold.
16) On January 1, 2011, Nadir Company issued $1,000,000 of 6%, 20-year bonds when the
market rate of interest was 5%. The bonds pay interest annually on December 31. Nadir uses the
effective interest method of amortization. On its statement of cash flows for the year ended
December 31, 2011, Nadir will show ________ cash paid for ________ activities.
A) $(60,000); financing
B) $(60,000); operating
C) $(50,000); financing
D) $(50,000); operating
17) On January 1, 2011, Alpha Company issued $1,000,000 of 5%, 20-year bonds to buy a new
computerized accounting system. The market rate of interest was 6%. The bonds pay interest
annually on December 31. Alpha uses the effective interest method of amortization. On its
income statement for the year ended December 31, 2011, Alpha will show interest expense of
________.
A) exactly $50,000
B) more than $50,000
C) less than $50,000
D) The answer cannot be determined without knowing the price for which the bonds were sold.
18) On January 1, 2011, Alpha Company issued $1,000,000 of 5%, 20-year bonds to buy a new
computerized accounting system. The market rate of interest was 6%. The bonds pay interest
annually on December 31. Alpha uses the effective interest method of amortization. On its
statement of cash flows for the year ended December 31, 2011, Alpha will show ________ cash
paid for ________ activities.
A) $(60,000); financing
B) $(60,000); operating
C) $(50,000); financing
D) $(50,000); operating
19) Explain the difference between short-term notes payable and long-term installment notes
payable.
20) Show the effect on the accounting equation of each of the events listed below:
Daffy’s Duct Shop, Inc.
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
1. Sept. 30, 2010: Issued
$100,000 of 9% bonds at
100. Interest will be paid
semiannually on March 31
and Sept. 30.
2. 2011:
3. March 31, 2011: Paid
the interest.
4. Sept. 30, 2011: Paid
the interest.
5. Dec. 31, 2011: Made
an adjusting entry to accrue
interest on the
bonds.
CC
Retained earnings
1.
100,000 Cash
100,000 BP
2.
2,250 Int pay
(2,250) Int exp
3.
(4,500) Cash
(2,250) Int pay
(2,250) Int exp
4.
(4,500) Cash
(4,500) Int exp
5.
2,250 Int pay
(2,250) Int exp
21) On December 1, 2010, IOU Corporation borrowed $100,000 at 12%. Both the interest and
principal are due in 3 months on February 28, 2011.
Required: Complete the table below for the note. Fill in the correct dollar amount AND put an
X in the appropriate box to indicate the financial statement where the amount will be found.
Amount
IS
BS
SOCF
Interest payable
Interest expense
Notes payable
Cash received from issuing notes
22) On December 1, 2010, Woodburn Corporation borrowed $150,000 at 10%. The interest and
principal are due in 3 months on March 1, 2011. Complete the table below for the note. Fill in
the correct dollar amount AND put an X in the appropriate box to indicate the financial statement
where the amount will be found.
Amount
At or for the year ended
December 31, 2010
IS
BS
SOCF
Interest payable
Interest expense
Cash from issuing notes
BS
Interest payable
Interest expense
Cash from issuing notes
Interest payable
$1,000 = $100,000 x .12 x (1/12)
Interest expense
$1,000
Notes payable
$100,000
Cash received from issuing notes
$100,000
23) On June 1, 2011, Par for the Course, Inc. purchased building and land for $1,000,000 by
signing a an $800,000, 10-year, 12% mortgage and paying the remainder in cash. Payments are
to be made at the beginning of each month. Fill in the correct dollar amount AND in the
appropriate box to indicate the financial statement where the amount will be found.
For the month ended and at June
30, 2011:
Income
Statement
Statement of
Cash Flows
Balance Sheet
1.
Interest expense
2.
Interest paid
3.
Interest payable
24) On June 1, 2011, Par for the Course, Inc. purchased building and land for $1,000,000 by
issuing $1,000,000 of 10-year, 6% bonds. Interest is to be paid annually on May 31. Fill in the
correct dollar amount in the appropriate box to indicate the financial statement where the
amount will be found.
For the year ended and at
December 31, 2011:
Income
Statement
Statement of
Cash Flows
Balance Sheet
1.
Interest expense
2.
Interest paid
3.
Interest payable
4.
Proceeds from borrowings
For the year ended and at
December 31, 2011:
Income Statement
Statement of
1.
Interest expense
2.
Interest paid
3.
Interest payable
4.
Proceeds from borrowings
For the month ended and
Income
Statement of
Balance Sheet
2.
Interest paid
3.
Interest payable
25) On December 31, 2011, Bill’s Hooks, Inc. issued $10,000 worth of 8% bonds at 88. The
market rate of interest at the time of issue was 10%. These are 10-year bonds with interest paid
annually at December 31. The company uses the effective-interest method to amortize the
discount. For each item listed below, fill in the correct dollar amount in the column that
represents the financial statement where the item will appear. Round amounts to the nearest
penny.
Income
Statement
Statement of Cash
Flows
Balance Sheet
1
Proceeds from issuing bonds
2
Interest expense for the year
ended December 31, 2012
3
Interest paid for the year
ended December 31, 2012
4
Carrying value of the bonds at
December 31, 2012
5
Interest expense for the year
ended December 31, 2013
6
Interest paid for the year
ended December 31, 2013
7
Carrying value of the bonds at
December 31, 2013
Income
Statement
Statement of Cash
Flows
Balance Sheet
1
Proceeds from issuing bonds
2
Interest expense for the year
ended December 31, 2012
3
Interest paid for the year ended
December 31, 2012
December 31, 2012
5
Interest expense for the year
ended December 31, 2013
6
Interest paid for the year ended
December 31, 2013
December 31, 2013
26) On December 31, 2011, Dew Drop Inn issued $10,000 worth of 10% bonds at 113 because
the market rate of interest at the time of issue had fallen to 8%. Interest on these 10-year bonds is
paid annually at December 31. The company uses the effective-interest method to amortize the
premium. For each item listed below, fill in the correct dollar amount in the column that
represents the financial statement where the item will appear:
Income
Statement
Statement of
Cash Flows
Balance Sheet
1
Proceeds from issuing bonds
2
Interest expense for the year ended
December 31, 2012
3
Interest paid for the year ended
December 31, 2012
4
Carrying value of the bonds at
December 31, 2012
5
Interest expense for the year ended
December 31, 2013
6
Interest paid for the year ended
December 31, 2013
7
Carrying value of the bonds at
December 31, 2013
1
Proceeds from issuing bonds
2
Interest expense for the year ended
December 31, 2012
3
Interest paid for the year ended
December 31, 2012
December 31, 2012
5
Interest expense for the year ended
December 31, 2013
6
Interest paid for the year ended
December 31, 2013
December 31, 2013
27) On December 31, 2011, Ben’s Batteries, Inc. issued $10,000 worth of 10%, 10-year bonds at
97. The market rate of interest at the time of issue was 11%. These bonds pay interest annually at
December 31. The company uses the effective-interest method to amortize the discount.
Required: For each item listed below, fill in the correct dollar amount in the column that
represents the financial statement where the item will appear: Round amounts to the nearest
penny.
Income
Statement
Statement of
Cash Flows
1
Proceeds from issuing bonds
2
Interest expense for the year
ended December 31, 2011
3
Interest paid for the year
ended December 31, 2011
4
Carrying value of the bonds at
December 31, 2011
5
Interest expense for the year
ended December 31, 2012
6
Interest paid for the year
ended December 31, 2012
7
Carrying value of the bonds at
December 31, 2012
28) On January 1, 2011, Sea the World Cruises, Inc. issued $100,000 worth of 8%, 10-year
Income
Statement
Statement of
Cash Flows
1
Proceeds from issuing
bonds
2
Interest expense for the year
ended December 31, 2011
3
Interest paid for the year
ended December 31, 2011
4
Carrying value of the bonds
at December 31, 2011
5
Interest expense for the year
ended December 31, 2012
6
Interest paid for the year
ended December 31, 2012
7
Carrying value of the bonds
at December 31, 2012
bonds at 88. The market rate of interest at the time of issue was 10%. Interest will be paid
SEMIANNUALLY on June 30 and December 31. Sea the World Cruises uses the effective
interest method for amortizing any bond discounts or premiums.
Part A: For each item listed below, fill in the correct dollar amount in the column that represents
the financial statement where the item will appear:
Income
Statement
Statement of
Cash Flows
1
Proceeds from issuing bonds
2
Interest expense for the 6
months ended June 30, 2011
3
Interest paid for the 6 months
ended June 30, 2011
4
Interest expense for the 6
months ended Dec. 31, 2011
5
Interest paid for the 6 months
ended Dec. 31, 2011
6
Carrying value of the bonds at
December 31, 2011
7
Interest expense for the
YEAR ended Dec. 31, 2011
8
Interest paid for the YEAR
ended Dec. 31, 2011
9
Interest expense for the 6
months ended June 30, 2012
10
Interest paid for the 6 months
ended June 30, 2012
11
Interest expense for the 6
months ended Dec. 31, 2012
12
Interest paid for the 6 months
ended Dec. 31, 2012
13
Carrying value of the bonds at
Dec. 31, 2012
14
Interest expense for the
YEAR ended Dec. 31, 2012
15
Interest paid for the YEAR
ended Dec. 31, 2012
Part B: Answer the following questions assuming the company uses straight-line
amortization:
1. Interest expense every six months will be $____________________.
2. The carrying value of the bonds at December 31, 2011 will be $_________________.
3. The carrying value of the bonds at December 31, 2012 will be $_________________.
29) On December 31, 2010, Crystal Palace, Inc. issued $100,000 worth of 9% bonds at 107. The
market rate of interest at the time of issue was 8%. These are 10-year bonds with interest paid
SEMIANNUALLY on June 30 and December 31. The company uses the effective-interest
method to amortize the discount.
Part A: For each item listed below, fill in the correct dollar amount in the column that represents
the financial statement where the item will appear:
Part A:
Income
Statement
Statement of
Cash Flows
Balance Sheet
1.
Proceeds from issuing bonds
2.
Interest expense for the 6
months ended June 30, 2010
3.
Interest paid for the 6 months
ended June 30, 2010
4.
Interest expense for the 6
months ended Dec. 31, 2010
5.
Interest paid for the 6 months
ended Dec. 31, 2010
6.
Carrying value of the bonds at
December 31, 2010
7.
Interest expense for the 6
months ended June 30, 2011
8.
Interest paid for the 6 months
ended June 30, 2011
9.
Interest expense for the 6
months ended Dec. 31, 2011
10.
Interest paid for the 6 months
ended Dec. 31, 2011
11.
Carrying value of the bonds at
December 31, 2011
Part B: Answer the following questions assuming the company uses STRAIGHT-LINE
amortization:
1. Interest expense every six months will be $____________________________.
2. The carrying value of the bonds at December 31, 2010 will be $____________________.
3. The carrying value of the bonds at December 31, 2011 will be $____________________.
Learning Objective 7-6
1) Financial leverage ________.
A) is always good for companies
B) refers to using borrowed money to increase earnings
C) is risk free
D) is the degree of negotiating ability
2) If a company earns more with the money it borrows than it has to pay to borrow that money, it
is called ________.
A) positive cost/benefit
B) negative cost/benefit
C) negative financial leverage
D) positive financial leverage
3) Positive financial leverage occurs when a company ________.
A) has more current assets than current liabilities
B) has a current ratio greater than 1.0 to 1
C) earns more with the money it borrows than it has to pay to borrow that money
D) has a high debt-to-equity ratio
4) The debt-to-equity ratio ________.
A) is total shareholders’ equity divided by total liabilities
B) is total liabilities divided by total shareholders’ equity
C) describes a company’s ability to make the interest payments on its debt
D) measures the firms’ ability to pay its bills on time
5) The debt-to-equity ratio ________.
A) compares the amount of creditors’ claims to the assets of the firm with owners’ claims to the
assets of the firm
B) measures a firm’s ability to pay its bills on time
C) describes a company’s ability to make the interest payments on its debt
D) is total shareholders’ equity divided by total assets
6) GuGa’s Shirt Company has current assets of $48,790; total assets of $536,780; current
liabilities of $43,000; total liabilities of $323,786; and shareholders’ equity of $212,994.
Calculate the debt-to-equity ratio.
A) 113%
B) 60%
C) 152%
D) 66%
7) Team Shirts has current assets of $162,348; total assets of $210,837; current liabilities of
$86,941; total liabilities of $101,745; and shareholders’ equity of $109,092. Calculate the debt–
to-equity ratio.
A) 188%
B) 53%
C) 93%
D) 193%
8) Doolitte & Daley, Inc. has current assets of $100,000; total assets of $300,000; current
liabilities of $80,000; total liabilities of $180,000; and shareholders’ equity of $120,000.
Calculate the debt-to-equity ratio.
A) 125%
B) 60%
C) 40%
D) 150%
XOAXOA: LO 7-6
9) Which financial statement(s) do you need to use to calculate the debt-to-equity ratio?
A) only the balance sheet
B) only the income statement
C) both the income statement and the balance sheet
D) the income statement, the balance sheet, and the statement of cash flows
10) If a company earns more with the money it borrows than it has to pay to borrow that money,
it has positive financial leverage.
11) The debt-to–equity ratio is calculated by dividing shareholders’ equity by total liabilities.
12) The debt-to–equity ratio compares the amount of creditors’ claims to the assets of a firm with
owners’ claims to the assets of the same firm.
13) When company’s debt–to-equity ratio is greater than 100% than its current ratio must be
greater than 1.0 to 1.
14) Tarnisha Smith is pleased with the performance of her business, Out of Africa. She is
thinking about borrowing money to expand her business. Before she does that, she wants to learn
more about using financial statements to analyze the impact of debt on her business. Explain to
Tarnisha what information about liabilities is found in each financial statement. Then explain to
Tarnisha how the debt-to-equity is used to evaluate companies.
15) Marcy wants to expand her catering business. However, she was raised to avoid debt at all
costs and prefers to have cash in hand before buying anything. She has $15,000 in cash available
for expansion, but the total estimated cost of the expansion is $100,000. Explain to Marcy the
advantages and disadvantages using a long-term note payable to finance the expansion.
Answer: A long-term note payable involves borrowing money for more than one year. Most
long-term notes payable require repayment in the form of regular monthly payments. The
payments consist of a combination of interest plus principal. At the end of the loan period the
balance owed will be reduced to zero.
16) What methods do analysts use to determine the impact of debt on a company’s financial
situation?
17) Chase Challengingware Store had $500,000 in total assets, $175,000 in total liabilities, and
$325,000 in shareholders’ equity. Interest expense for the period was $7,500. Income from
operations was $50,000. Calculate the debt-to-equity ratio. Round your answer to the nearest
tenth of a percent.
18) Maxine’s Equipment Company had $400,000 in total assets, $275,000 in total liabilities, and
$125,000 in shareholders’ equity. Interest expense for the period was $15,050. Income from
operations was $80,000. Calculate the debt-to-equity ratio. Round your answer to the nearest
percentage.
19) Lockwood Corporation had $1,523,000 in total assets, $758,000 in total liabilities, and
$765,000 in stockholders’ equity. Interest expense for the period was $151,350. Income from
operations was $380,750. Calculate the debt-to-equity ratio. Round your answer to the nearest
tenth of a percent.
20) Merryworth, Inc. had $2,000,000 in total assets, of which $600,000 are current assets, and
$1,200,000 in total liabilities, of which $400,000 are current liabilities. Calculate the debt-to–
equity ratio. Round your answer to the nearest whole percent.
21) Berry Rich, Inc. had $600,000 in total assets, of which $200,000 are current assets, and
$200,000 in shareholders’ equity, of which $80,000 is contributed capital. Calculate the debt–to–
equity ratio. Round your answer to the nearest whole percent.