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Exam 9: Long-Term Liabilities

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Question 41

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Which of the following statements is correct?

A) Bonds are always issued at their face value.
B) Bonds issued at more than their face value are said to be issued at a discount.
C) Bondholders must hold their bonds until maturity to receive cash for their investment.
D) None of the other answers are correct

E) C) and D)
F) B) and D)

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Question 42

Multiple Choice

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For the issuer of 20-year bonds,the carrying value using the effective interest method would decrease each year if the bonds were sold at a: $\begin{array}{l}\begin{array} { c c } &\text { Discount } & \text { Premium } \\a.&\text { No } & \text { No } \\b.&\text { No } & \text { Yes } \\c.&\text { Yes } & \text { Yes } \\d.&\text { Yes } & \text { No }\end{array}\end{array}$

A) Option a
B) Option b
C) Option c
D) Option d

E) A) and D)
F) A) and C)

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Question 43

True/False

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

Raiders Company issues a bond with a stated interest rate of 10%,face value of $50,000,and due in 5 years.Interest payments are made semi-annually.The market rate for this type of bond is 12%.What is the issue price of the bond?

Presented below is a partial amortization schedule for Discount Foods: 1.Record the bond issue. 2.Record the first interest payment.

A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?

Given the information below,which bond(s) will be issued at a discount? $\begin{array} { | l | c | c | c | c | } \hline & \text { Bond 1 } & \text { Bond 2 } & \text { Bond 3 } & \text { Bond 4 } \\\hline \text { Stated Rate of Return } & 10 \% & 8 \% & 12 \% & 12 \% \\\hline \text { Market Rate of Return } & 12 \% & 8 \% & 15 \% & 10 \% \\\hline\end{array}$

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:

Bonds usually sell at their:

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

The rate of interest expense incurred on a bond payable for bonds of similar risk is called the:

Secured bonds are backed by the federal government.

Bonds are the most common form of corporate debt.

An amortization schedule provides a summary of the cash interest payments,interest expense,and changes in carrying value for each period.

Interest expense on bonds payable is calculated as the:

Western World has the following selected data ($ in millions): $\begin{array}{lrr}\text { Balance Sheet Data }&2012&2011\\\text { Total Assets } & \mathbf{\$ 2 , 5 1 1} & \mathbf{\$ 2 , 3 1 5} \\\text { Total Liabilities } & 1,685 & 1,525 \\\text { Total Stockholders' Equity } & 826 & 790\end{array}$ $\begin{array}{lr}\text { Income Statement Data }\\\text { Sales } & \$ 786 \\\text { Interest Expense } & 77 \\\text { Tax Expense } & 32 \\\text { Net Income } & 80\end{array}$ Based on these amounts,calculate the following ratios for Western World in 2012: 1.Debt to equity ratio. 2.Return on assets ratio. 3.Return on equity ratio. 4.Times interest earned ratio.

Bonds can be secured or unsecured.Likewise,bonds can be term or serial bonds.Which is more common?

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

X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: $\begin{array}{lllll} & \text { Cash } & \text { Interest } & \text { Decrease in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1 / 1 / 10 & & & & \$ 104,212 \\12 / 31 / 11 & \$ 7,000 & \$ 6,253 & \$ 747 & 103,465 \\12 / 31 / 12 & 7,000 & 6,208 & 792 & 102,673\\12 / 31 / 13 & 7,000 & 6,160 & 840 & 101,833 \\12 / 31 / 14 & 7,000 & 6,110 & 890 & 100,943 \\12 / 31 / 15 & 7,000 & 6,057 & 943 & 100,000\end{array}$ -X2 issued the bonds for:

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