Accounting 201Chapter 09 Practice Test Flashcards
If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at A) A premium. B) Face amount. C) A discount. D) A discount or premium depending on the maturity date.
A
Which of the following is a primary source of corporate debt financing? A) Accounts receivable. B) Accounts payable. C) Inventories. D) Bonds.
D
Alliance Energy issues bonds at a discount. On the maturity date, the bonds’ carrying value will be A) Above face amount. B) Below face amount. C) At face amount. D) Depending on the current market rates.
C
If bonds were issued at a discount, interest expense will be A) Lower than cash interest paid. B) Higher than cash interest paid. C) Equal to cash interest paid. D) Lower or higher depending on current market interest rates.
B
Schoene Corporation issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Schoene decides to call the bonds. Schoene estimates that over the next eight years, it will save $16 million of cash interest. The journal entry to retire the bonds will include a: A) Gain of $2 million. B) Loss of $2 million. C) Gain of $16 million. D) Gain of $14 million.
B
Callable bonds: A) Provide potential benefits only to the issuer. B) Provide potential benefits only to the investor. C) Provide potential benefits to both the issuer and the investor. D) Provide no potential benefits.
A
Which of the following is not an advantage of debt financing? A) Interest is tax deductible. B) The cost of borrowing may be lower than the return on equity. C) The ownership interest of current stockholders is unchanged. D) Debt financing often has no maturity date.
D
If bonds are issued at a premium, over the life of the bonds, the carrying value will: A) Increase. B) Decrease. C) Stay the same. D) Depend on the current market interest rate.
B
If bonds are issued at a premium, over the life of the bonds, interest expense will: A) Decrease. B) Increase. C) Remain unchanged. D) The effect cannot be determined from the information given.
A
Which of the following is true regarding a company assuming more debt? A) Assuming more debt is always bad for the company. B) Assuming more debt is always good for the company. C) Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds. D) Assuming more debt reduces leverage.
C
