Question :
88.The carrying value of a bond issued at a premium: : 1254209
88.The carrying value of a bond issued at a premium:
A. decreases by equal amounts each year if straight-line amortization is used.
B. decreases by equal amounts each year if effective interest amortization is used.
C. increases by equal amounts each year if straight-line amortization is used.
D. decreases by smaller and smaller amounts each year if straight-line amortization is used.
Wagoner Company issued bonds with a face value of $200,000, a 10% stated rate of interest, and a 10-year term. The bonds were issued on January 1, 2013, and Wagoner uses the effective interest method of amortization. The market rate of interest on the date of issue was 8%. Interest is paid annually on December 31.
89.Assuming Wagoner issued the bonds for $215,970, the carrying value of the bonds on the 12/31/15 balance sheet would be:
A. $207,133.
B. $213,248.
C. $210,308.
D. $202,400.
90.Assuming Wagoner issued the bond for $215,970, the amount of interest expense appearing on the 2015 income statement would be:
A. $20,000.
B. $17,278.
C. $16,825.
D. $23,175.
91.If a company uses the effective interest method of amortizing a bond discount, the interest expense that is recognized each year
A. will be greater than the interest payment.
B. will increase from year to year.
C. will remain the same from year to year.
D. Both A and B are correct.
92.If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond
A. will decrease by equal amounts each year.
B. will decrease by smaller amounts each year.
C. will decrease by larger amounts each year.
D. will be lower than the face value of the bond until maturity.
93.Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?
A. Not having to pay back the principal.
B. Ability to raise large amounts of capital.
C. Tax-deductibility of interest.
D. Tax-deductibility of dividends.
94.The times-interest-earned ratio is calculated by which of the following?
A. Total assets divided by interest expense.
B. Earnings before interest and taxes divided by interest expense.
C. Net income divided by interest expense.
D. None of these.
95.Company A and Company B are identical in all regards except that during 2013 Company A borrowed $20,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $20,000 from sale of common stock. Company B agreed to pay a $2,000 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of 2013, and by what amount?
A. Company A’s retained earnings would be higher by $2,000.
B. Company B’s retained earnings would be higher by $1,400.
C. Company A’s retained earnings would be higher by $600.
D. Both would show the same retained earnings.
96.On January 1, 2013 Bluefield Co. issued $100,000 of 10%, 20-year bonds. If Bluefield’s tax rate is 40%, the after-tax cost of borrowing related to these bonds for 2013 is:
A. $4,000.
B. $6,000.
C. $10,000.
D. $14,000.
97.Which of the following conditions indicate a company has a relatively high level of financial risk?
A. A low debt to assets ratio.
B. A low times interest earned ratio.
C. A high return on equity.
D. A high current ratio.
98.Garza, Inc. and Marx, Inc. each had the same financial position on 1/1/13. The following is a summary of each of their balance sheets as of 1/1/13: Garza is about to raise $200,000 in cash by issuing bonds. Marx is going to raise $200,000 on the same day by issuing common stock. Immediately after these transactions, which of the following statements will be correct?
A. Garza’s current ratio will be higher than Marx’s.
B. Garza’s current ratio will be lower than Marx’s.
C. Garza’s debt to asset ratio will be higher than Marx’s.
D. Garza’s debt to asset ratio will be lower than Marx’s.
99.Terra Company reported income before taxes of $90,000. The company is in a 30% income tax bracket. Also, Terra’s income statement contained a charge for interest expense amounting to $30,000. Based on this information alone, the company’s times interest ratio would be:
A. 2.1.
B. 3.0.
C. 3.1.
D. 4.0.
