Assignment
1 The debt to equity ratio is a measure of financial leverage.
a. True b. False
2 Leases of shortterm assets are capital leases, and leases of longterm assets are operating leases.
a. True b. False
3 The interest coverage ratio equals income before income taxes plus interest expense divided by
a. income before income taxes.
b. interest expense.
c. income taxes.
d. gross profit.
4 Which of the following is not an advantage of issuing longterm debt?
a. Increased earnings accrue to the stockholders.
b. The risk of becoming bankrupt is reduced.
c. The interest is taxdeductible.
d. The stockholders do not relinquish any control.
5 The advantages of financial leverage accrue primarily to
a. management.
b. stockholders.
c. lenders.
d. bondholders.
6 Adair Corporation purchased a building on January 2 by signing a longterm $1,200,000 mortgage with monthly payments of $11,000. The mortgage carries an interest rate of 10 percent. The amount owed on the mortgage at the end of the first month will be
a. $1,199,000.
b. $1,190,000.
c. $1,200,000.
d. $1,189,000.
7 If the market interest rate is higher than the face interest rate at the date of issuance, bonds will
a. sell at face value.
b. not sell until the face interest rate is adjusted.
c. sell at a premium.
d. sell at a discount.
8 Bond issue costs
a. must be amortized over the life of the bonds.
b. are recorded in an asset account and not amortized.
c. must be expensed when incurred.
d. appear on the balance sheet as a liability.
9 On January 2, 2,013, Owsley Corporation issued 20year bonds payable with a face value of $600,000 and a face interest rate of 10 percent. The bonds were issued to yield a market interest rate of 12 percent. Interest is payable annually on January 2. In calculating the present value of the bond issue of January 2, 2,013, the
a. 12 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
b. 10 percent rate will be used to calculate the present value of the face amount and the 12 percent rate will be used to calculate the present value of the periodic interest payments.
c. 10 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
d. 12 percent rate will be used to calculate the present value of the face amount and the 10 percent rate will be used to calculate the present value of the periodic interest payments.
10 In 2,010, Hopkins Corporation issued tenyear, 10 percent bonds when the market interest rate was 12 percent. Interest is payable annually. During 2,013, the market rate of interest for similar bonds was 14 percent. Using the effective interest method of amortization, what interest rate will be used to calculate interest expense for 2,013?
a. 12 percent
b. 10 percent
c. 14 percent
d. 4 percent
11 When the straightline method of amortization is used for a bond discount, the amount of interest expense for an interest period is calculated by
a. multiplying the face value of the bonds by the face interest rate.
b. multiplying the carrying value of the bonds by the effective interest rate.
c. adding the amount of discount amortization for the period to the amount of cash paid for interest during the period.
d. deducting the amount of discount amortization for the period from the amount of cash paid for interest during the period.
12 Trigg Corporation issued $200,000 of 20year, 6 percent bonds at 98 on one of its semiannual interest dates. The straightline method of amortization is to be used. The entry to record the bond interest expense on the next interest payment date is:
a.
b.
c.
d.
13 Kenton Corporation issued $556,000 of 30year, 8 percent bonds at 106 on one of its semiannual interest dates. The straightline method of amortization is to be used. The entry to record the bond interest expense on the next interest payment date is:
a.
b.
c.
d.
14 A company issued $300,000 of 20year, 8 percent bonds at 96. If interest is paid semiannually, the entry to record the amount of bond interest expense (assuming the straightline method of amortization) on any interest date is
a.
b.
c.
d.
15 Rowan Corporation issued tenyear term bonds on January 1, 2,013, with a face value of $400,000. The face interest rate is 6 percent and interest is payable semiannually on June 30 and December 31. The bonds were issued for $345,480 to yield an effective annual rate of 8 percent. The effective interest method of amortization is to be used. How much bond interest expense (rounded to the nearest dollar) should be reported on the income statement for the year ended December 31, 2,013?
a. $27,638
b. $27,566
c. $27,711
d. $24,000
16 When bonds payable are converted into stock, the carrying value of the bonds should be
a. debited to Retained Earnings.
b. credited to Retained Earnings.
c. debited to Loss on Conversion of Bonds.
d. credited to Contributed Capital Accounts.
17 Which of the following qualifies as a capital lease?
a. Monthly lease on office space that can be canceled with 30 days' notice
b. Fiveyear lease on equipment with an option to renew for one more year
c. Threeyear lease on a company vehicle
d. Sevenyear lease on a machine that has a sevenyear useful life
18 A company with income before income taxes of $192,000, and $40,000 in interest expense, has an interest coverage ratio of
a. 5.8 times.
b. 6.8 times.
c. 4.8 times.
d. 3.8 times.
19 Under a defined benefit pension plan,
a. accounting for annual pension expense is simple.
b. the employer guarantees the employees certain benefits upon retirement.
c. actuarial computations are unnecessary.
d. retirement payments are based on the amount accumulated in the pension fund.
20 A corporation issues bond certificates to
a. principals.
b. debtors.
c. creditors.
d. owners.
Attachment:- MCQ.rar