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Exam 9: Long-Term Liabilities

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Question 51

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At the maturity date, the carrying value will equal the face amount of the bond.

A) True
B) False

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Question 52

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Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is also 7%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2012.

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Question 53

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Bonds issued below face amount are said to be issued at a discount.

Bonds usually sell at their:

A gain or loss is recorded on bonds retired at maturity.

Why do some companies issue bonds rather than borrow money directly from a bank?

Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

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

THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/12 and retires them. What gain or loss, if any, would THA record on this date?

What is capital structure? Why would a company choose to borrow money rather than issue additional stock?

Given the information below, which bond(s) will be issued at a premium? $\begin{array} { | l | c | c | c | c | } \hline & \underline { \text { Bond 1 } } & \underline { \text { Bond 2 } } & \underline { \text { Bond 3 } } & \underline { \text { Bond 4 } } \\\hline \text { Stated Rate of Return } & 5 \% & 10 \% & 7 \% & 10 \% \\\hline \text { Market Rate of Return } & 7 \% & 8 \% & 7 \% & 9 \% \\\hline\end{array}$

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

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

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. 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?

Selected financial data for Lowes is provided below: $\begin{array} { l r } \text { (\$ in millions) } & \underline { \text { Lowes } } \\\text { Sales } & \$ 47,220 \\\text { Interest expense } & 287 \\\text { Tax expense } & 1,042 \\\text { Net income } & \$ 1,783\end{array}$ What is the times interest earned ratio for Lowes?

Which of the following is true regarding a company assuming more debt?

On January 1, 2012, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $800,000. Record the bond issue on January 1, 2012, and the first two semiannual interest payments on June 30, 2012, and December 31, 2012.

Which of the following definitions describes a secured bond?

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?

Serial bonds require payment of the full principal amount of the bond at a single maturity date.