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Exam 9: Long-Term Liabilities

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Question 21

True/False

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A premium occurs when the issue price of a bond is above its face amount.

A) True
B) False

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Question 22

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The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

A) True
B) False

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Question 23

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Bonds payable should be reported as a long-term liability in the balance sheet at:

The lower the market interest rate, the lower the bond issue price will be.

Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $330,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?

For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds.

Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 8%. 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.

When bonds are retired before their maturity date:

Which of the following statements is correct?

Pizza Pier retires its 7% bonds for $70,000 before their scheduled maturity. At the time, the bonds have a carrying value of $74,937. Record the early retirement of the bonds.

Financial leverage is best measured by which of the following ratios?

What is the annual market interest rate on the bonds?

Western World has the following selected data ($ in millions): 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.

Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are tax-deductible.

Two leading home improvement chains in the United States are Home Depot and Lowes. Selected financial data for these two close competitors are as follows: $\begin{array} { l r r } \text { (\$ in millions) } & \text { Home Depot } & \text { Lowes } \\& & \\\text { Total assets } & \$ 40,877 & \$ 33,005 \\\text { Total liabilities } & 21,484 & 13,936 \\\text { Total stockholders' equity } & 19,393 & 19,069 \\& & \\\text { Sales } & \$ 66,176 & \$ 47,220 \\\text { Interest expense } & 676 & 287 \\\text { Tax expense } & 1,362 & 1,042 \\\text { Net income } & 2,620 & 1,783\end{array}$ 1. Calculate the debt to equity ratio for Home Depot and Lowes. Which company has the higher ratio? 2. Calculate the times interest earned ratio for Home Depot and Lowes. Which company is better able to meet interest payments as they become due?

Return on equity is calculated as net income divided by average stockholders' equity.

Selected financial data for Home Depot is provided below: $\begin{array} { l r } \text { (\$ in millions) } & \underline { \text { Home Depot } } \\\text { Sales } & \$ 66,176 \\\text { Interest expense } & 676 \\\text { Tax expense } & 1,362 \\\text { Net income } & \$ 2,620\end{array}$ What is the times interest earned ratio for Home Depot?

When an issuer retires debt of any type before its scheduled maturity date, the transaction is an early extinguishment of debt.

Secured bonds are backed by the federal government.

Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a lower interest rate for borrowing.