Q: A company’s times-interest-earned (TIE) ratio is calculated as:

$$\frac{\text{Income from operations}}{\text{Interest expense}}$$

Q: A company’s leverage ratio is calculated as:

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

Q: A company’s debt ratio is calculated as:

$$\frac{\text{Total liabilities}}{\text{Total assets}}$$

Question 1

A company issues $1,000,000 of 8% bonds at 97 when the market rate is 9%. Interest is paid semiannually. Using the straight-line method, what is the total amount of bond discount to be amortized over the life of the bonds?

Accepted Answer

$30,000

Question 2

Which of the following best describes the effect of issuing bonds at a discount on the issuer’s financial statements over the life of the bond?

Accepted Answer

Interest expense will be greater than the periodic cash interest paid.

Question 3

On January 1, 2023, a company issues $500,000 of 6% bonds at 104. The bonds mature in 5 years and pay interest semiannually. What is the journal entry to record the issuance of the bonds?

Accepted Answer

Db. Cash $$520,000; Cr. Premium on Bonds Payable 20$$,000; Cr. Bonds Payable $500,000

Question 4

A $$200,000, 5-year, 5% bond is issued at a price of 213$$,056. Interest is paid semiannually. Using the straight-line method, what is the amount of premium amortized each period?

Accepted Answer

$816

Question 5

A company issues $700,000 of 12% bonds at a market rate of 14%. Interest is paid semiannually. What is the periodic cash interest payment?

Accepted Answer

$42,000

Question 6

Which of the following statements about the carrying value of bonds issued at a discount is correct?

Accepted Answer

The carrying value increases over time as the discount is amortized.

Question 7

Southwest Airlines has $$300,000 of bonds outstanding with a carrying value of 300$$,500. The bonds are called and retired at 99. What is the gain or loss on retirement?

Accepted Answer

$3,500 gain

Question 8

Garden’s Ltd. has pretax accounting income of $$600,000 and taxable income of 500$$,000. The income tax rate is 25%. What is the amount of income tax expense and income tax payable, respectively?

Accepted Answer

$$150,000 and 125$$,000

Question 9

Which of the following best describes a green bond?

Accepted Answer

A bond issued to finance projects with positive environmental impact.

Question 10

A company’s times-interest-earned (TIE) ratio is calculated as:

Accepted Answer

$$\frac{	ext{Income from operations}}{	ext{Interest expense}}$$

Question 11

Which of the following is a reason a company might retire bonds before maturity?

Accepted Answer

To relieve the pressure of high interest payments.

Question 12

If a company issues $500,000 of 5-year, 4% bonds at 94, what is the amount of cash received at issuance?

Accepted Answer

$470,000

Question 13

Which of the following best describes the effect of a bond premium on interest expense using the straight-line method?

Accepted Answer

Interest expense is less than the periodic cash interest paid.

Question 14

A company’s leverage ratio is calculated as:

Accepted Answer

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

Question 15

Which of the following is NOT a feature of a serial bond?

Accepted Answer

All bonds mature at the same time.

Question 16

A company’s debt ratio is calculated as:

Accepted Answer

$$\frac{	ext{Total liabilities}}{	ext{Total assets}}$$

Question 17

Which of the following is a temporary difference that can result in a deferred tax liability?

Accepted Answer

Using straight-line depreciation for financial reporting and accelerated depreciation for tax reporting.

Question 18

A company is considering three projects. Project 1 would increase the debt ratio above the covenant limit, Project 2 would not violate any covenants, and Project 3 would reduce the current ratio below the required threshold. Which project(s) can the company undertake without violating debt covenants?

Accepted Answer

Only Project 2

Question 19

Which of the following is true regarding the accounting for leases under current GAAP?

Accepted Answer

Both finance and operating leases must be capitalized and reported on the balance sheet.

Chapter 9: Long-Term Liabilities – Bonds Payable and Amortization (Financial Accounting)

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