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Exam 9: Long-Term Liabilities

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Question 31

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The times interest earned ratio compares interest expense with income available to pay interest charges.

A) True
B) False

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Question 32

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Interest expense incurred when borrowing money,as well as dividends paid to stockholders,are tax-deductible.

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B) False

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Question 33

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Discount-Mart issues $10 million in bonds on January 1, 2012. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: $\begin{array}{ccccc} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 8,640,967 \\6 / 30 / 12 & \$ 300,000 & \$ 345,639 & \$ 45,639 & 8,686,606 \\12 / 31 / 12 & 300,000 & 347,464 & 47,464 & 8,734,070\\6 / 30 / 13 & 300,000 & 349,363 & 49,363 & 8,783,433 \\12 / 31 / 13 & 300,000 & 351,337 & 51,337 & 8,834,770\end{array}$ -What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)

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

On January 1, 2012, Water Wonderland issues $20 million of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. 1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

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

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

Ordinarily,the proceeds from the sale of a bond issue will be equal to:

Magic Mountain retires its 8% bonds for $125,000 before their scheduled maturity.At the time,the bonds have a carrying value of $118,000.Record the early retirement of the bonds.

Return on equity is calculated as net income divided by average stockholders' equity.

When bonds are issued at a discount and the effective interest method is used for amortization,at each subsequent interest payment date,the cash paid is:

Bonds payable should be reported as a long-term liability in the balance sheet at:

Which of the following is not a reason why some companies lease rather than buy?

Discount-Mart issues $10 million in bonds on January 1, 2012. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: $\begin{array}{ccccc} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 12 & & & & \$ 8,640,967 \\6 / 30 / 12 & \$ 300,000 & \$ 345,639 & \$ 45,639 & 8,686,606 \\12 / 31 / 12 & 300,000 & 347,464 & 47,464 & 8,734,070\\6 / 30 / 13 & 300,000 & 349,363 & 49,363 & 8,783,433 \\12 / 31 / 13 & 300,000 & 351,337 & 51,337 & 8,834,770\end{array}$ -What is the carrying value of the bonds as of December 31,2013?

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

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

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

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

What are the potential risks and rewards of carrying additional debt? How does additional debt affect a company's return to investors?

Which of the following is not true regarding callable bonds?