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Exam 9: Long-Term Liabilities

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Question 41

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Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.

A) True
B) False

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Question 42

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Which of the following is true for bonds issued at a premium?

A) The stated interest rate is less than the market interest rate.
B) The market interest rate is less than the stated interest rate.
C) The stated interest rate and the market interest rate are equal.

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

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Question 43

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Bond X and Bond Y are both issued by the same company.Each of the bonds has a face value of $100,000 and each matures in 10 years.Bond X pays 8% interest while Bond Y pays 9% interest.The current market rate of interest is 8%.Which of the following is correct?

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?

A callable bond allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.

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:

The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

Serial bonds require payment of the full principal amount of the bond at a single maturity date.Serial bonds require payments in installments over a series of years.

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.

Under an operating lease,leasing improves the balance sheet by reducing:

When bonds are issued at a premium (above face amount),the carrying value and the corresponding interest expense increase over time.When bonds are issued at a premium (above face amount),the carrying value and the corresponding interest expense decrease over time.

A bond issued at a discount indicates that at the date of issue:

The advantages of obtaining long-term funds by issuing bonds,rather than issuing additional common stock,include which of the following?

A bond issued at a premium indicates that at the date of issue:

The advantages of obtaining long-term funds by issuing bonds,rather than issuing additional common stock,include which of the following?

The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date.

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

A bond issue with a face amount of $500,000 bears interest at the rate of 7%.The current market rate of interest is 6%.These bonds will sell at a price that is:

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

A $500,000 bond issue sold for $490,000.Therefore,the bonds: