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Principles of Accounting - Financial > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

What is a mixture of liabilities and stockholders’ equity that a business uses?

A

Capital structure

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2
Q

What occurs when a company is borrowing money?

A

Debt financing

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3
Q

What occurs when a company is obtaining investment from stockholders?

A

Equity financing

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4
Q

How do companies obtain external funding?

A

Debt and equity financing

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5
Q

Which of the following statements is true?

a. Profits generated by a company are a source of external financing.
b. Dividends paid are a tax-deductible expense.
c. Interest paid on debt is a tax-deductible expense.
d. All of the above are true.

A

c. Interest paid on debt is a tax-deductible expense.

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6
Q

What is one advantage to debt financing?

A

Interest on borrowed funds is tax-deductible

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7
Q

What is the formula to find interest expense?

A

Carrying value x market interest rate x fraction of the year

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8
Q

What is the layout for an amortization schedule?

A

Date, Cash Paid, Interest Expense, Decrease in Carrying Value, Carrying Value

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9
Q

When you borrow money what is your initial carrying value?

A

The amount of money that you borrow

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10
Q

What is the formula to find the carrying value of the first month?

A

Initial carrying value - decrease in carry value

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11
Q

Does the cash paid value change?

A

No

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12
Q

What do you debit and credit when you establish a notes payable?

A

You debit cash and credit notes payable

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13
Q

When you initially borrow money or take out a loan what do you debit and credit?

A

You debit cash and credit notes payable

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14
Q

Make the initial journal entry:

Assume a $25,000, 6%, four-year loan for a new delivery truck on January 1, 2018. Payments of $587.13 are required at the end of each month for 48 months.

A

Cash 25,000

Notes Payable 25,000

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15
Q

When you borrow money or take out a loan what do you debit and credit for the monthly payments?

A

You debit interest expense and notes payable and credit cash

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16
Q

Make a journal entry for the first 2 monthly payments:

Assume a $25,000, 6%, four-year loan for a new delivery truck on January 1, 2018. Payments of $587.13 are required at the end of each month for 48 months.

A

25,000 x 6% x (1/12) = 125
587.13 - 125 = 462.13

(D) Interest Expense 125
(D) Notes Payable 462.13
(C) Cash 587.13

25,000 - 462.13 = 24,537.87
24,537.87 x 6% x (1/12) = 122.69

(D) Interest Expense 122.69
(D) Notes Payable 464.44
(C) Cash 587.13

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17
Q

Tropical Paradise borrows $24,000 and agrees to a 5%, five-year installment loan with the bank. Payments of $452.91 are due at the end of each month. How much interest should be recorded for the first month?

a. All $452.91 is attributable to interest.
b. $100.00
c. $352.91
d. $0

A

b. $100.00

24,000 x 5% x (1/12) = 100

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18
Q

What is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time?

A

A lease

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19
Q

What type of lease is it when the lessor owns the asset, and the lessee simply uses the asset temporarily?

A

Operating Lease

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20
Q

What type of lease is it when the lessee buys an asset and borrows the money through a lease to pay for the asset?

A

Capital Lease

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21
Q

Assume a company has assets of $100 million, liabilities of $60 million, and stockholders’ equity of $40 million. The company then signs a new lease to purchase long-term assets valued at $10 million.

What does total assets equal under a operating lease?

A

100

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22
Q

Assume a company has assets of $100 million, liabilities of $60 million, and stockholders’ equity of $40 million. The company then signs a new lease to purchase long-term assets valued at $10 million.

What does total assets equals under a capital lease?

A

110

100 + 10

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23
Q

What is the formula to find a capital lease’s ratio of liabilities to stockholders equity?

A

(liabilities + purchase of long-term assets) / stockholders’ equity

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24
Q

What is the formula to find an operating lease’s ratio of liabilities to stockholders equity?

A

Liabilities / stockholders’ equity

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25
Q

Fill in the Blank: Lower or Higher

The ratio of liabilities to stockholders equity is _____ under a capital lease

A

Higher

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26
Q

Which of the following leases is essentially the purchase of an asset with debt financing?

a. A capital lease
b. An operating lease
c. Both a capital and operating lease
d. Neither a capital lease nor an operating lease

A

a. A capital lease

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27
Q

What is a formal debt instrument that obligates the borrower to repay a stated amount at a specified maturity date?

A

A bond

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28
Q

What is the money set aside to pay debts as they come due called?

A

The sinking fund

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29
Q

What type of bond is supported by specific assets pledged as collateral by the issuer?

A

Secured bond

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30
Q

What type of bond is secured only by the “full faith and credit” of the issuing corporation?

A

Unsecured bond

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31
Q

What type of bond matures on a single date?

A

Term bond

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32
Q

What type of bond matures in installments?

A

Serial bond

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33
Q

What type of bond allows the issuer to pay off the bonds early at a fixed price?

A

Callable bond

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34
Q

What type of bond allows the investor to transfer each bond into shares of common stock?

A

Convertible bond

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35
Q

What includes underwriting, legal, accounting, registration, and printing fees?

A

Bond issue costs

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36
Q

Which of the following bonds always matures on a single date?

a. A serial bond
b. A term bond
c. A secured bond
d. A convertible bond

A

b. A term bond

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37
Q

On January 1, 2018, California Coasters raises money for development of its new roller coaster by issuing $100,000 of bonds paying a stated interest rate of 7%. The bonds are due in 10 years, with interest payable semiannually on June 30 and December 31 each year.

What is the face amount?

A

100,000

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38
Q

What is the formula to find the periods to maturity?

A

The years until bonds are due x 2

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39
Q

What is the formula to find the interest payment?

A

Face amount x stated interest rate x # of payments per year

40
Q

Fill in the Blank:

When the market and stated interest rate is the same, the issue price equals the _________

A

Face amount

41
Q

What is the formula to find the issue price?

A

Present value of face amount + present value of interest payment

42
Q

When finding the issue price do you use the market or stated interest rate?

A

You use the market interest rate

43
Q

When finding the issue price what is the formula to find the market interest rate amount?

A

Market interest rate / 2

44
Q

If stated interest rate > market interest rate the bond is issues at:

a. Face amount
b. A premium
c. A discount

A

b. A premium

45
Q

If stated interest rate < market interest rate the bond is issues at:

a. Face amount
b. A premium
c. A discount

A

c. A discount

46
Q

If stated interest rate = market interest rate the bond is issues at:

a. Face amount
b. A premium
c. A discount

A

a. Face amount

47
Q

If a 10-year bond is issued with a stated rate of 9% when the market rate is 8%, the bonds will be issued at ______?

a. A premium
b. A discount
c. Face amount
d. Cannot determine with information given

A

a. A premium

48
Q

What do you debit and credit when you issue bonds at face value?

A

You debit cash and credit bonds payable

49
Q

What do you debit and credit when you issue bonds at face value and pay the first interest payment?

A

You debit interest expense and credit cash

50
Q

Make a journal entry:

Issue $100,000 of bonds paying 7% interest for $100,000, assuming a 7% market interest rate

A

Face Amount
Cash 100,000
Bonds Payable 100,000

51
Q

Make a journal entry for the first semiannual interest payment:

Issue $100,000 of bonds paying 7% interest for $100,000, assuming a 7% market interest rate

A

Face Amount
100,000 x 7% x (1/2) = 3,500

Interest Expense 3,500
Cash 3,500

52
Q

What do you debit and credit when you issue bonds at a discount?

A

You debit cash and discount on bonds payable and credit bonds payable

53
Q

What do you debit and credit when you issue bonds at a discount and pay the interest payments?

A

You debit interest expense and credit cash and discount on bonds payable

54
Q

Make a journal entry:

Issue $100,000 of bonds paying 7% interest for $93,205, assuming an 8% market interest rate

A

(D) Cash 93,205
(D) Discount of Bonds Payable 6,795
(C) Bonds Payable 100,000

55
Q

Make a journal entry for the first and second semiannual interest payment:

Issue $100,000 of bonds paying 7% interest for $93,205, assuming an 8% market interest rate

A

1st Payment:
93,205 x 8% x (1/2) = 3,728
100,000 x 7% x (1/2) = 3,500

(D) Interest Expense 3,728
(C) Discount of Bonds Payable 228
(C) Cash 3,500

2nd Payment:
(93,205 + 228) x 8% x (1/2) = 3,737

(D) Interest Expense 3,737
(C) Discount of Bonds Payable 237
(C) Cash 3,500

56
Q

When you issue bonds at a discount what is your initial carrying value amount?

A

The amount of your discount

57
Q

What do you debit and credit when you issue bonds at a premium?

A

You debit cash and credit bonds payable and premium on bonds payable

58
Q

What do you debit and credit when you issue bonds at a premium and pay the interest payments?

A

You debit interest expense and premium on bonds payable and credit cash

59
Q

Make a journal entry:

Issue $100,000 of bonds paying 7% interest for $107,439, assuming a 6% market interest rate

A

(D) Cash 107,439
(C) Premium on Bonds Payable 7,439
(C) Bonds Payable 100,000

60
Q

Make a journal entry for the first and second semiannual interest payment:

Issue $100,000 of bonds paying 7% interest for $107,439, assuming a 6% market interest rate

A

1st Payment:
107,439 x 6% x (1/2) = 3,223
100,000 x 7% x (1/2) = 3,500

(D) Interest Expense 3,223
(D) Premium on Bonds Payable 277
(C) Cash 3,500

2nd Payment:
(107,439 - 277) x 6% x (1/2) = 3,215

(D) Interest Expense 3,215
(D) Premium on Bonds Payable 285
(C) Cash 3,500

61
Q

When finding the interest expense do you use the market interest rate or stated interest rate?

A

The market interest rate

62
Q

When finding the cash (cash paid) do you use the market interest rate or stated interest rate?

A

The stated interest rate

63
Q

When you issue a discount do you add or subtract the 1st payment’s discount on bonds payable from the 2nd payment’s interest expense?

A

You add

Discount on Bonds Payable = 228
Interest Expense = (107,439 + 228) x 6% x (1/2) = 3,737

64
Q

When you issue a premium do you add or subtract the 1st payment’s premium on bonds payable from the 2nd payment’s interest expense?

A

You subtract

Premium on Bonds Payable = 277
Interest Expense = (107,439 - 277) x 6% x (1/2) = 3,215

65
Q

When you issue a premium what is your initial carrying value amount?

A

The amount of your premium

66
Q

Fill in the Blank: Increase or Decrease

For a bond issued at a premium, carrying value ______ overtime

A

Decreases

67
Q

Fill in the Blank: Increase or Decrease

For a bond issued at a discount, carrying value ______ overtime

A

Increases

68
Q

When bonds are issued at face amount do the carrying value and the corresponding interest expense remain constant over time?

A

Yes

69
Q

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

a. The stated interest rate > market rate
b. The stated interest rate < market rate
c. The stated interest rate = market rate
d. The stated interest rate is unrelated to the market rate

A

b. The stated interest rate < market rate

70
Q

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

a. The stated interest rate > market rate
b. The stated interest rate < market rate
c. The stated interest rate = market rate
d. The stated interest rate is unrelated to the market rate

A

a. The stated interest rate > market rate

71
Q

Which of the following statements is true for bonds issued at face amount?

a. The stated interest rate > market rate
b. The stated interest rate < market rate
c. The stated interest rate = market rate
d. The stated interest rate is unrelated to the market rate

A

c. The stated interest rate = market rate

72
Q

What occurs when the issuing corporation buys back its bonds from the investors?

A

Bond retirements

73
Q

What do you debit and credit when bonds retire on maturity?

A

You debit bonds payable and credit cash

74
Q

Is there a gain or loss recorded on bonds retired on maturity?

A

No

75
Q

Make a journal entry:

Assume $100,000 in bonds are retired at maturity (December 31, 2027)

A

Bonds Payable 100,000

Cash 100,000

76
Q

Is there a gain or loss recorded on bonds retired before maturity?

A

Yes

77
Q

What do you debit and credit when bonds retire before maturity with a loss?

A

You debit bonds payable, premium on bonds payable, and loss and credit cash

78
Q

When bonds retire before maturity what is the bonds payable amount equal to?

A

The face amount

79
Q

When bonds retire before maturity how do you find the premium on bonds payable amount?

A

You take the carrying value of the bonds one year later - the bonds payable amount

80
Q

When bonds retire before maturity what is the cash amount equal to?

A

The amount paid before maturity

81
Q

Make a journal entry:

California Coasters issued bonds on January 1, 2018, above face amount (at a premium) at $107,439. The carrying value of the bonds one year later on December 31, 2018, is $106,877. Record the bond retirement before maturity on December 31, 2018 for $114,353.

A

(D) Bonds Payable 100,000
(D) Premium on Bonds Payable 6,877
(D) Loss 7,476
(C) Cash 114,353

PoBP = 106,877 - 100,000
Loss = 114,353 - 6,877
82
Q

When bonds retire before maturity how do you find the loss amount?

A

You take cash - premium on bonds payable

83
Q

A company retires a $50 million bond issue before maturity when the carrying value is $48 million, but the market value is $54 million. The company will record:

a. A loss of $6 million
b. A gain of $6 million
c. Neither a gain nor a loss
d. A debit to Cash of $54 million

A

a. A loss of $6 million

carrying value < market value = loss
54 - 48 = 6

84
Q

What do you debit and credit when bonds retire before maturity with a gain?

A

You debit bonds payable and premium on bonds payable and credit gain and cash

85
Q

What is one of the first places decision makers look when trying to get a handle on risk ?

A

Long-term debt

86
Q

What are the two ratios used to measure financial risk related to long-term liabilities?

A
  1. Debt to equity ratio

2. Times interest earned ratio

87
Q

What is a measure of financial leverage?

A

The debt to equity ratio

88
Q

What enables a company to earn a higher return using debt than without debt?

A

Leverage

89
Q

What is the formula to find the debt to equity ratio?

A

Total liabilities/stockholders’ equity

90
Q

When finding the debt to equity ratio do you use the numbers from the current year or the ones from the previous year?

A

You use the numbers from the current year

91
Q

Is a higher or lower debt to equity ratio better?

A

Higher is better

92
Q

What is the formula to find the times interest earned ratio?

A

(Net income + interest expense + tax expense) / interest expense

93
Q

When finding the debt to equity ratio do you add all the total liabilities up or do you just use the total liability from the current year?

A

You use the total liability from the current year

94
Q

What measures a company’s ability to meet interest payments as they become due?

A

The times interest earned ratio

95
Q

Which of the following ratios best measures financial leverage?

a. Return on assets
b. Inventory turnover
c. Times interest earned
d. Debt to equity ratio

A

d. Debt to equity ratio

Principles of Accounting - Financial (11 decks)

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