$\frac{\text{Total debt (liabilities)}}{\text{Total assets}}$

$\frac{\text{Average total assets}}{\text{Average common stockholders' equity}}$

Question 1

Which of the following best describes a secured bond?

Accepted Answer

A bond that gives the bondholder the right to assets of the issuer if the company defaults.

Question 2

Southwest Airlines issues $100,000 of 9% bonds at par. What is the semiannual interest payment?

Accepted Answer

$4,500

Question 3

If the stated interest rate on a bond is less than the market interest rate at issuance, the bond will be issued at:

Accepted Answer

Discount

Question 4

Which formula correctly calculates the debt ratio?

Accepted Answer

$\frac{	ext{Total debt (liabilities)}}{	ext{Total assets}}$

Question 5

A company issues $100,000 of 9% bonds at a price of $104,100 when the market rate is 8%. What is the premium on bonds payable?

Accepted Answer

$4,100

Question 6

Under the effective-interest method, how does interest expense change over the life of a bond issued at a discount?

Accepted Answer

Interest expense increases each period.

Question 7

Which of the following is NOT typically stated on a bond certificate?

Accepted Answer

Company’s net income

Question 8

A company issues $100,000 of 9% bonds at a discount for $96,149. What is the total discount on bonds payable?

Question 9

Which formula represents the leverage ratio (equity multiplier)?

Accepted Answer

$\frac{	ext{Average total assets}}{	ext{Average common stockholders' equity}}$

Question 10

When a bond is issued at a premium, what happens to the carrying value of the bond over its life using the effective-interest method?

Accepted Answer

It decreases to face value at maturity.

Question 11

Which of the following statements about the time value of money and bond pricing is correct?

Accepted Answer

Bond prices reflect the present value of future cash flows, considering the time value of money.

Question 12

If Southwest Airlines retires $100,000 of bonds at maturity, what is the journal entry?

Accepted Answer

Debit Bonds Payable $100,000; Credit Cash $100,000

Question 13

Which method of amortization is considered most theoretically correct for bonds issued at a discount or premium?

Accepted Answer

Effective-interest method

Question 14

A company’s leverage ratio is calculated as 3.40. What does this indicate?

Accepted Answer

The company has $3.40 of total assets for every $1 of common stockholders’ equity.

Question 15

Which of the following is true regarding the reporting of long-term liabilities under U.S. GAAP?

Accepted Answer

Fair values are based on quoted market prices and may differ from carrying amounts.

Question 16

Which scenario will result in a bond being issued at par?

Accepted Answer

Stated interest rate equals market interest rate.

Question 17

A company issues $100,000 of 9% bonds at a discount for $96,149. What is the initial carrying value of the bonds?

Accepted Answer

$96,149

Question 18

Which of the following best describes an unsecured bond (debenture)?

Accepted Answer

A bond backed only by the good faith of the borrower.

Question 19

When using the effective-interest method to amortize a bond discount, what happens to the bond’s carrying value over time?

Accepted Answer

It increases to face value at maturity.

Question 20

Which of the following is a real-world implication of a high debt ratio for a company?

Accepted Answer

The company may face higher interest rates on future borrowing.

Chapter 9: Long-Term Liabilities – Bonds Payable, Amortization, and Financial Statement Impact

Study Guide - Practice Questions