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Exam 9: Long-Term Liabilities

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Question 31

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For a five-year installment note signed on January 1,2016,at which of the following dates would the carrying value be the highest?

A) August 1,2016
B) November 30,2019
C) April 30,2020

D) All of the above
E) A) and C)

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Question 32

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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.

A) True
B) False

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Question 33

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Which of the following is not a primary source of corporate debt financing?

Financial leverage is best measured by which of the following ratios?

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: THA issued the bonds for: $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Increase in } \\\text { Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 194,758 \\\hline 6 / 30 / 2018 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\\hline 12 / 31 / 2018 & 7,000 & 7,822 & 822 & 196,370 \\\hline 6 / 30 / 2019 & 7,000 & 7,865 & 865 & 197,225 \\\hline 12 / 31 / 2019 & 7,000 & 7,889 & 889 & 198,114 \\\hline 6 / 30 / 2020 & 7,000 & 7,925 & 925 & 199,039 \\\hline 12 / 31 / 2020 & 7,000 & 7,961 & 961 & 200,000 \\\hline\end{array}$

Term bonds are:

The mixture of liabilities and stockholders' equity a business uses is called its:

Which of the following is a reason why some companies lease rather than buy?

The lower the market interest rate,the lower the bond issue price will be.The higher the market interest rate,the lower the bond issue price will be.

Serial bonds are:

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: What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate) $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Increase in } \\\text { Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 194,758 \\\hline 6 / 30 / 2018 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\\hline 12 / 31 / 2018 & 7,000 & 7,822 & 822 & 196,370 \\\hline 6 / 30 / 2019 & 7,000 & 7,865 & 865 & 197,225 \\\hline 12 / 31 / 2019 & 7,000 & 7,889 & 889 & 198,114 \\\hline 6 / 30 / 2020 & 7,000 & 7,925 & 925 & 199,039 \\\hline 12 / 31 / 2020 & 7,000 & 7,961 & 961 & 200,000 \\\hline\end{array}$

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?

Megginson,Inc.issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000.What effect would the bond issuance have on Megginson,Inc.'s accounting equation?

When bonds are issued at a discount,what happens to the carrying value and interest expense over the life of the bonds?

The market interest rate represents the true interest rate used by investors to value a company's bond issue.

Unsecured bonds are not backed by a specific asset.

An amortization schedule for a bond issued at a premium:

Which of the following is the primary source of corporate equity financing?

The cash payment each period is calculated as the carrying value times the market rate.The cash payment each period is calculated as the face value times the stated interest rate.

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: X2 issued the bonds for: $\begin{array} { | c | r | r | r | r | } \hline \text { Date } & \begin{array} { r } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { r } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { r } \text { Decrease } \\\text { in Carrying } \\\text { Value }\end{array} & \begin{array} { r } \text { Carrying } \\\text { Value }\end{array} \\\hline 1 / 1 / 2018 & & & & \$ 104,212 \\\hline 12 / 31 / 2018 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\\hline 12 / 31 / 2019 & 7,000 & 6,208 & 792 & 102,673 \\\hline 12 / 31 / 2020 & 7,000 & 6,160 & 840 & 101,833 \\\hline 12 / 31 / 2021 & 7,000 & 6,110 & 890 & 100,943 \\\hline 12 / 31 / 2022 & 7,000 & 6,057 & 943 & 100,000 \\\hline\end{array}$