Does a stock dividend increase an investor's personal wealth immediately?

Does a stock dividend increase an investor's personal wealth immediately? 

a. No, because the stock price falls when a stock dividend is issued.
b. Yes, because the investor has more shares.
c. Yes, because the investor acquired additional shares without paying a brokerage fee.
d. Yes, because the investor will receive more in cash dividends by owning more shares.


Answer: a. No, because the stock price falls when a stock dividend is issued.

When treasury stock is purchased with cash, what is the impact on the balance sheet equation?

When treasury stock is purchased with cash, what is the impact on the balance sheet equation?

a. No change: the reduction of the asset cash is offset with the addition of the asset treasury stock.
b. Assets decrease and stockholders' equity increases.
c. Assets increase and stockholders' equity decreases.
d. Assets decrease and stockholders' equity decreases.


Answer: d. Assets decrease and stockholders' equity decreases.

Which statement regarding dividends is false?

Which statement regarding dividends is false? 

a. Dividends represent a sharing of corporate profits with owners.
b. Both stock and cash dividends reduce retained earnings.
c. Cash dividends paid to stockholders reduce net income.
d. None of the above statements are false.


Answer: c. Cash dividends paid to stockholders reduce net income.

A company has net income $225,000 and declares and pays dividends in the amount of $75,000. What is the net impact on retained earnings?

A company has net income $225,000 and declares and pays dividends in the amount of $75,000. What is the net impact on retained earnings? 

a. Increase of $225,000
b. Decrease of $75,000
c. Increase of $150,000
d. Decrease of $150,000


Answer: c. Increase of $150,000

A journal entry is not recorded on what date?

A journal entry is not recorded on what date? 

a. date of declaration
b. date of record
c. date of payment
d. A journal entry is recorded on all of these dates.


Answer: b. date of record

A company issues 100,000 shares of common stock with a par value of $1 per share. The stock sold for $20 per share. By what amount does stockholders' equity increase?

A company issues 100,000 shares of common stock with a par value of $1 per share. The stock sold for $20 per share. By what amount does stockholders' equity increase? 

a. $100,000 
b. $1,900,000
c. $2,000,000
d. No change in stockholder's equity


Answer: c. $2,000,000

Which order best describes the largest number of shares to the smallest number of shares?

Which order best describes the largest number of shares to the smallest number of shares? 

a. shares authorized, shares issued, shares outstanding
b. shares issued, shares outstanding, shares authorized
c. shares outstanding, shares issued, shares authorized
d. shares in the treasury, shares outstanding, shares issued


Answer: a. shares authorized, shares issued, shares outstanding

Which of the following statements about stock dividends is true?

Which of the following statements about stock dividends is true? 

a. Stock dividends are reported on the statement of cash flow.
b. Stock dividends are reported on the statement of retained earnings.
c. Stock dividends increase total equity.
d. Stock dividends decrease total equity.


Answer: b. Stock dividends are reported on the statement of retained earnings.

Which statement regarding treasury stock is false?

Which statement regarding treasury stock is false? 

a. Treasury stock is considered to be issued but not outstanding.
b. Treasury stock has no voting, dividend, or liquidation rights.
c. Treasury stock reduces total equity on the balance sheet.
d. None of the above are false.


Answer: d. None of the above are false.

Katz Corporation has issued 400,000 shares of common stock and holds 20,000 shares in treasury. The charter authorized the issuance of 500,000 shares. The company has declared and paid a dividend of $1 per share. What is the total amount of the dividend?

Katz Corporation has issued 400,000 shares of common stock and holds 20,000 shares in treasury. The charter authorized the issuance of 500,000 shares. The company has declared and paid a dividend of $1 per share. What is the total amount of the dividend? 

a. $400,000
b. $20,000
c. $380,000
d. $500,000



Answer: c. $380,000

On March 31, a corporation issued a 2 for 1 stock split of its 100,000 shares of $0.01 par value common stock. As a result of the stock split:

On March 31, a corporation issued a 2 for 1 stock split of its 100,000 shares of $0.01 par value common stock. As a result of the stock split:

A) stockholders' equity remained unchanged.
B) stockholders' equity decreased.
C) retained earnings were decreased.
D) stockholders' equity increased.


Answer: A) stockholders' equity remained unchanged.

The corporation issued a small stock dividend of 15 percent of its 120,000 outstanding shares of common stock. You own 1,000 shares of the common stock, prior to the stock dividend. As a result of the stock dividend:

The corporation issued a small stock dividend of 15 percent of its 120,000 outstanding shares of common stock. You own 1,000 shares of the common stock, prior to the stock dividend. As a result of the stock dividend:

A) you have 150 more additional shares of common stock.
B) your total stockholders' equity increased.
C) the company's total stockholders' equity increased.
D) you had a monetary gain equal to the 150 shares multiplied times the market price.


Answer: A) you have 150 more additional shares of common stock.

On the date of declaration, which account is debited for the amount of the declared cash dividend?

On the date of declaration, which account is debited for the amount of the declared cash dividend?

A) Retained Earnings
B) Cash Dividend Expense
C) Common Stock
D) Contributed Capital


Answer: A) Retained Earnings

Which of the following is TRUE about treasury stock?

Which of the following is TRUE about treasury stock?

A) It is an asset.
B) It receives cash dividends.
C) It retains voting rights.
D) It is a contra-equity account.


Answer: D) It is a contra-equity account

A corporation reacquired 1,000 shares of its $0.01 par value common stock outstanding, paying $14 per share. Three months later, the 500 shares of the treasury stock was reissued for $16 per share. The journal entry to record the sale of the treasury stock will include:

A corporation reacquired 1,000 shares of its $0.01 par value common stock outstanding, paying $14 per share. Three months later, the 500 shares of the treasury stock was reissued for $16 per share. The journal entry to record the sale of the treasury stock will include:

A) a credit to Treasury Stock for $8,000.
B) a credit to Treasury Stock for $7,000.
C) a debit to Cash for $7,000.
D) a credit to Capital from Treasury Stock Transaction of $7,000.


Answer: B) a credit to Treasury Stock for $7,000.

After a company's stock has been traded on established markets, additional sales of new stock are called:

After a company's stock has been traded on established markets, additional sales of new stock are called:

A) seasoned new issues.
B) treasury stock.
C) an initial public offering (IPO).
D) a secondary public offering.


Answer: A) seasoned new issues.

A corporation sold 10,000 shares of $5 par value common stock for $40 per share. The journal entry to record the transaction will include:

A corporation sold 10,000 shares of $5 par value common stock for $40 per share. The journal entry to record the transaction will include:

A) a credit to Gain on Sale of Common Stock for $350,000.
B) a credit to Common Stock for $50,000.
C) a credit to Common Stock for $400,000.
D) a credit to Capital in Excess of Par Value for $35,000.


Answer: B) a credit to Common Stock for $50,000.

What is the earnings per share?

Consider the following:
Beginning number of outstanding shares of common stock - 1,100,000
Net income - $1,500,000
Ending number of outstanding shares of common stock - 1,300,000
Number of shares of treasury stock - 200,000

What is the earnings per share?

A) $1.50
B) $1.25
C) $1.20
D) $1.15


Answer: B) $1.25

A corporation's charter permits the corporation to issue 100,000 shares of $0.01 par value common stock. The corporation sold 50,000 shares and, later, reacquired 1,000 shares to hold as treasury stock. What is the number of shares outstanding?

A corporation's charter permits the corporation to issue 100,000 shares of $0.01 par value common stock. The corporation sold 50,000 shares and, later, reacquired 1,000 shares to hold as treasury stock. What is the number of shares outstanding?

A) 100,000
B) 50,000
C) 51,000
D) 49,000



Answer: D) 49,000

Which of the following is a benefit of the corporate form of business?

Which of the following is a benefit of the corporate form of business?

A) raising large amounts of capital is easier
B) ownership interests are easily transferred
C) limited liability of the owners (stockholders)
D) all of the above


Answer: D) all of the above

Ardent Inc had 1,000 shares of $100 par, 6% preferred stock outstanding, as well as 100,000 shares of $.01 par common stock On March 31, 1996, their year-end, the board of directors declared a dividend of $9,500. In the past, they have tried to maintain minimum dividend of $.1 per share on common stock.

Ardent Inc had 1,000 shares of $100 par, 6% preferred stock outstanding, as well as 100,000 shares of $.01 par common stock On March 31, 1996, their year-end, the board of directors declared a dividend of $9,500. In the past, they have tried to maintain minimum dividend of $.1 per share on common stock.

Suppose the preferred stock is cumulative, and Ardent, having had a slow year, was unable to pay any dividends last year. In that case, preferred stockholders would receive _______ and common stockholders would receive _______ on March 31 of this year.


a. $6,000; $3,500
b. $12,000; $0
c. $9,500; $0
d. $12,000; $10,000
e. $4,750; $4,750


Answer: c. $9,500; $0
- 1,000 shares x $100 par value x 6% = $6,000 for last year plus only $3,500 for this year since the dividends owed for this year ($6,000) exceed the amount available for this year ($9,500 dividend declared - $6,000 already paid to preferred stockholders for the last years dividend in arrears = only $3,500 available for this year ;
- $9,500 dividend declared - $9,500 paid to preferred stockholders = $0

Ardent Inc had 1,000 shares of $100 par, 6% preferred stock outstanding, as well as 100,000 shares of $.01 par common stock On March 31, 1996, their year-end, the board of directors declared a dividend of $9,500. In the past, they have tried to maintain minimum dividend of $.1 per share on common stock. For the March 31 dividend, referred stockholders would receive a total of ________ and common stockholders a total of ________.

Ardent Inc had 1,000 shares of $100 par, 6% preferred stock outstanding, as well as 100,000 shares of $.01 par common stock On March 31, 1996, their year-end, the board of directors declared a dividend of $9,500. In the past, they have tried to maintain minimum dividend of $.1 per share on common stock. For the March 31 dividend, referred stockholders would receive a total of ________ and common stockholders a total of ________.

a. $6,000; $10,000
b. $0; $9,500
c. $4,750; $4,750
d. $0; $10,000
e. $6,000; $3,500


Answer: e. $6,000; $3,500
- 1,000 shares x $100 par value / 6% = $6,000 ;
- $9,500 dividend declared - $6,000 paid to preferred stockholders = $3,500

A stock split, unlike a stock dividend,

A stock split, unlike a stock dividend,

a. requires no journal entry
b. does not change total stockholders' equity
c. reduces the par value of the stock
d. increases the total number of shares outstanding
e. both a and c


Answer: e. both a and c

The dividend yield ratio is

The dividend yield ratio is 

a. calculated by dividing dividends per share by market price per share
b. calculated by dividing total cash dividends by market price per share.
c. calculated by dividing market price per share by dividends per share.
d. calculated by dividing dividends by net income.
e. a measure of the portion of current earnings that is paid to owners in the form of dividends


Answer: a. calculated by dividing dividends per share by market price per share

On December 31, 1995, the board of directors of Ardent Inc. issued a press release to the newspapers stating that the company panned to pay a dividend of $.12 per share on its common stock. The date of this announcement is known as the date of _______; the company must record a liability ______.

On December 31, 1995, the board of directors of Ardent Inc. issued a press release to the newspapers stating that the company panned to pay a dividend of $.12 per share on its common stock. The date of this announcement is known as the date of _______; the company must record a liability ______.

a. record; on the date of declaration
b. record; on the date of record
c. declaration; in the year in which teh dividend will be paid
d. declaration; on the date of declaration
e. dividend; when the books are closed for the fiscal year


Answer: d. declaration; on the date of declaration

Cosmic Treats Co. purchased 40,000 shares of its own $1 par common stock on the open market for $600,000. Cosmic intends to hold the stock for employee bonuses. This stock would be carried on Cosmic's books in

Cosmic Treats Co. purchased 40,000 shares of its own $1 par common stock on the open market for $600,000. Cosmic intends to hold the stock for employee bonuses. This stock would be carried on Cosmic's books in 

a. a contra equity account
b. the common stock account
c. an asset account, at cost.
d. an asset account, at par value
e. a liability account


Answer: a. a contra equity account
-Specifically, the Treasury Stock account

Quinn had one hundred shares of Compact common stock that she had purchased for $21 per share. She sold the shares to Randy for $28 per share. On Compact's books this would

Quinn had one hundred shares of Compact common stock that she had purchased for $21 per share. She sold the shares to Randy for $28 per share. On Compact's books this would

a. be shown ass an increase in stockholders' equity of $2,800
b. be shown ass an increase in stockholders' equity of $700
c. be shown ass an increase in retained earnings of $700
d. be shown ass an increase to additional paid in capital of $700
e. not be shown at all


Answer: e. not be shown at all

Compact Corporation as 50,000,000 shares of common stock, par value $.01, authorized, and 16,697,000 shares issued and outstanding. Its total paid in capital is $199,623,000. The average price received by Compact for a share of its stock was

Compact Corporation as 50,000,000 shares of common stock, par value $.01, authorized, and 16,697,000 shares issued and outstanding. Its total paid in capital is $199,623,000. The average price received by Compact for a share of its stock was 

a. $.01
b. $3.99
c. $11.96
d. $21.13
e. cannot be calculated from the information given


Answer: c. $11.96
- $199,623,000 total paid in capital / 16,697,000 shares issued and outstanding = 11.96

Compact Corporation as 50,000,000 shares of common stock, par value $.01, authorized, and 16,697,000 shares issued and outstanding. Its total paid in capital is $199,623,000. If Compact rounds all dollar amounts on its financial statements to the nearest thousandth, the dollar amount reported as common stock on its balance sheet would be

Compact Corporation as 50,000,000 shares of common stock, par value $.01, authorized, and 16,697,000 shares issued and outstanding. Its total paid in capital is $199,623,000. If Compact rounds all dollar amounts on its financial statements to the nearest thousandth, the dollar amount reported as common stock on its balance sheet would be

a. $500
b. $200
c. $167
d. $199
e. $333


Answer: c. $167
- 16,697,000 shares issued and outstanding X $.01 par value per share = $166,970; rounded to the nearest thousandth = $167

Outstanding shares of stock are those which

Outstanding shares of stock are those which 

a. have been issued to investors
b. have been issued and have not been bought back by the company
c. the company is permitted by its charter to issue
d. are authorized, but have not yet been issued
e. have been repurchased by the company


Answer: b. have been issued and have not been bought back by the company

In order to create a corporation, it is necessary to apply to

In order to create a corporation, it is necessary to apply to 

a. the federal government
b. the appropriate office in the state in which the corporation will be organized
c. the SEC
d. the FASB
e. the IRS


Answer: b. the appropriate office in the state in which the corporation will be organized

A stockholder of a corporation is

A stockholder of a corporation is 

a. one of the owners of the corporation
b. a creditor of the corporation
c. both an owner and a creditor of the corporation
d. a manager of the corporation
e. both c and d


Answer: a. one of the owners of the corporation

Transactions involving capital stock are reported as cash flows from investing activities in the statement of cash flows.

Transactions involving capital stock are reported as cash flows from investing activities in the statement of cash flows.

Answer: False - Transactions involving capital stock are reported as cash flows from financing (rather than investing) activities in the statement of cash flows

The chief advantage of preferred stock is that its dividends must be paid before any dividends can be paid to common shareholders.

The chief advantage of preferred stock is that its dividends must be paid before any dividends can be paid to common shareholders.

Answer: True

A stock split results in a decrease in the par value of the stock, and a proportionate increase in the number of shares outstanding.

A stock split results in a decrease in the par value of the stock, and a proportionate increase in the number of shares outstanding.

Answer: True

A large stock dividend is recorded at the par value of the shares distributed.

A large stock dividend is recorded at the par value of the shares distributed.

Answer: True

Common stock with a low dividend yield would not appeal to potential investors who need steady income from dividends.

Common stock with a low dividend yield would not appeal to potential investors who need steady income from dividends.

Answer: True

The dividend yield ratio measures the dividend return on the par value of the stock.

The dividend yield ratio measures the dividend return on the par value of the stock.

Answer: False - The dividend yield ratio measures the dividend return on the current price (rather than par value) of the stock

When no other qualifying statements are made, the term "dividend" can mean either a cash or a stock dividend.

When no other qualifying statements are made, the term "dividend" can mean either a cash or a stock dividend.

Answer: False - Without a qualifier, "dividend" means a cash dividend

Treasury stock consists of unissued shares of the company's stock.

Treasury stock consists of unissued shares of the company's stock.

Answer: False - Treasury stock consists of shares of company stock that the company has repurchased

When shareholders in a corporation sell all or part of their holdings to other private individuals, no entry is required on the part of the corporation.

When shareholders in a corporation sell all or part of their holdings to other private individuals, no entry is required on the part of the corporation.

Answer: True

Contributed capital from the sale of stock with a par value is usually divided between amounts received equal to par value of the shares sold and amounts received in excess of par.

Contributed capital from the sale of stock with a par value is usually divided between amounts received equal to par value of the shares sold and amounts received in excess of par.

Answer: True

Legal capital is a permanent amount of capital that owners cannot withdraw.

Legal capital is a permanent amount of capital that owners cannot withdraw.

Answer: True

If a corporation only has one class of stock, it is common stock.

If a corporation only has one class of stock, it is common stock.

Answer: True

EPS is an effective and widely used measure of liquidity.

EPS is an effective and widely used measure of liquidity.

Answer: False - EPS is an effective and widely used measure of profitability (rather than liquidity)

The earnings per share (EPS) ratio is computed by dividing net income by average number of common shares issued during the period.

The earnings per share (EPS) ratio is computed by dividing net income by average number of common shares issued during the period.

Answer: False - The EPS ratio is computed by dividing net income by the average number of common shares outstanding during the period

Unlimited liability refers to the fact that creditors of a liquidated corporation can put claims on the assets of shareholders for debts that corporate assets are insufficient to pay.

Unlimited liability refers to the fact that creditors of a liquidated corporation can put claims on the assets of shareholders for debts that corporate assets are insufficient to pay.

Answer: False - Unlimited liability applies to the owners of sole proprietorships and partnerships; not to corporations.

When treasury stock is help, the number of shares issued and the number of shares outstanding differ by the number of shares of treasury stock held.

When treasury stock is help, the number of shares issued and the number of shares outstanding differ by the number of shares of treasury stock held.

Answer: True

Outstanding shares refer to the total number of shares of stack that are owned by stockholders on any particular date.

Outstanding shares refer to the total number of shares of stack that are owned by stockholders on any particular date.

Answer: True

The number of authorized shares in a corporation refers to the original number of shares issued when that company "went public".

The number of authorized shares in a corporation refers to the original number of shares issued when that company "went public".

Answer: False - The number of authorized shares is the maximum number of shares the corporation is permitted to offer for sale (as set forth in its corporate charter)

Assume the bonds are retired early at the call price. Determine the loss on the bond call.

Bonds Payable balance (1,000 × $1,000) = $1,000,000
Discount on Bonds Payable balance = $40,000
Call price per bond = $1,010

Assume the bonds are retired early at the call price. Determine the loss on the bond call.

A) $40,000
B) $100,000
C) $60,000
D) $50,000


Answer: D) $50,000

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the interest expense, to the nearest dollar, for the second interest period?

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the interest expense, to the nearest dollar, for the second interest period?

A) $4,377
B) $4,596
C) $4,396
D) $4,158


Answer: C) $4,396

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the bond discount would be credited to Discount on Bonds Payable at the end of the first interest period?

A $100,000, 10-year, 8% bond that pays interest semiannually was sold for $87,539 when the market rate of interest was 10%. Using the effective-interest method, determine how much of the bond discount would be credited to Discount on Bonds Payable at the end of the first interest period?

A) $377
B) $754
C) $2,000
D) $4,377



Answer: A) $377

A corporation with a high times interest earned ratio means that:

A corporation with a high times interest earned ratio means that:

A) the company's operating income is equal to its interest obligations.
B) the company's net income is less than its interest obligations.
C) the company is not meeting its interest obligations.
D) the company's net income plus interest expense plus income tax is greater than its interest obligations.


Answer: D) the company's net income plus interest expense plus income tax is greater than its interest obligations.

What is the selling price (to the nearest dollar) of 4-year bonds with a par value of $200,000 and an annual coupon rate of 8% that are sold when the market rate of interest is 12%?

Periods
8%/10%/12%/14%
1/0.9259/0.9091/0.8929/0.8772
2/0.8573/0.8264/0.7972/0.7695
3/0.7938/0.7513/0.7118/0.6750
4/0.7350/0.6830/0.6355/0.5921
Periods
8%/10%/12%/14%
1/0.9259/0.9091/0.8929/0.8772
2/1.7883/1.7355/1.6901/1.6467
3/2.5771/2.4869/2.4018/2.3216
4/3.3121/3.1699/3.0373/2.9137

What is the selling price (to the nearest dollar) of 4-year bonds with a par value of $200,000 and an annual coupon rate of 8% that are sold when the market rate of interest is 12%?

A) $180,093
B) $175,697
C) $199,994
D) $200,000


Answer: B) $175,697

When the premium on bonds is amortized, the amount of recognized interest expense is

When the premium on bonds is amortized, the amount of recognized interest expense is

A) greater than the amount of cash paid for interest.
B) equal to the amount of cash paid for interest.
C) equal to the amount of cash paid for interest less the amount of premium amortization.
D) equal to the premium amortization recognized and recorded.


Answer: C) equal to the amount of cash paid for interest less the amount of premium amortization.

Accounting for a zero coupon bond is similar to

Accounting for a zero coupon bond is similar to

A) accounting for a bond sold at a discount.
B) accounting for a bond sold at a premium.
C) accounting for a bond sold at par value.
D) accounting for common stock sold at a price less than par value.


Answer: A) accounting for a bond sold at a discount

Bonds with a par value of $500,000 are sold at discount for $481,000. Other than the Cash account, what other account is debited.

Bonds with a par value of $500,000 are sold at discount for $481,000. Other than the Cash account, what other account is debited.

A) Premium on Bonds Payable
B) Discount on Bonds Payable
C) Bonds Payable
D) Interest Expense


Answer: B) Discount on Bonds Payable

A bond issued and supported by the general credit standing of the corporation, rather than supported with pledged assets, is called

A bond issued and supported by the general credit standing of the corporation, rather than supported with pledged assets, is called

A) a serial bond.
B) a debenture.
C) an indenture.
D) callable bond.


Answer: B) a debenture.

Which of the following may be a disadvantage to issuing bonds to raise long-term capital?

Which of the following may be a disadvantage to issuing bonds to raise long-term capital?

A) interest payments to bondholders are fixed charges
B) ownership and control of the company are unaffected
C) positive financial leverage may be achieved
D) interest expense is tax deductible


Answer: A) interest payments to bondholders are fixed charges

When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date?

When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date? 

a. Interest expense
b. Cash interest payment
c. Amortization
d. None of the above


Answer: c. Amortization

When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the

When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the 

a. Par value of the bonds.
b. Coupon rate of interest stated in the bond certificate.
c. Market rate of interest on the date the bonds were issued.
d. Both (a) and (b).


Answer: c. Market rate of interest on the date the bonds were issued.

To determine whether a bond will be sold at a premium, discount, or face value, one must know which of the following pairs of information?

To determine whether a bond will be sold at a premium, discount, or face value, one must know which of the following pairs of information? 

a. The par value and the coupon rate on the date the bonds were issued.
b. The par value and the market rate on the date the bonds were issued.
c. The coupon rate and the market rate on the date the bonds were issued.
d. The coupon rate and the stated rate on the date the bonds were issued.


Answer: c. The coupon rate and the market rate on the date the bonds were issued.

A bond with a face value of $100,000 was issued for $113,500 on January 1, 2009. The stated rate of interest is 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31, 2009?

A bond with a face value of $100,000 was issued for $113,500 on January 1, 2009. The stated rate of interest is 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31, 2009? 

a. $10,000
b. $8,000
c. $11,350
d. $9,080


Answer: b. $8,000

Which of the following is false when a bond is issued at a premium?

Which of the following is false when a bond is issued at a premium? 

a. The bond will issue for an amount above its par value.
b. Bonds payable will be credited for the par value of the bond.
c. Interest expense will exceed the cash interest payments.
d. All of the above are false.


Answer: c. Interest expense will exceed the cash interest payments.

Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital?

Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital? 

a. Stockholders maintain proportionate ownership percentages.
b. Interest expense reduces taxable income.
c. Timing flexibility associated with the payment of interest.
d. All of the above are advantages associated with bonds.


Answer: c. Timing flexibility associated with the payment of interest.

Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this?

Annual interest expense for a single bond issue continues to increase over the life of the bonds. Which of the following explains this? 

a. The market rate of interest has increased since the bonds were sold.
b. The coupon rate of interest has increased since the bonds were sold.
c. The bonds were sold at a discount.
d. The bonds were sold at a premium.


Answer: c. The bonds were sold at a discount.

Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

Since Reedham and quip has agreed to buy the bonds from Scuppers, Reedham and Quip would be referred to as the

a. indenture
b. custodian
c. investment banker
d. trustee
e. underwriter.

Answer: e. underwriter.

The provision allowing retirement of the bonds before maturity makes these ______ bonds. 

a. Debenture
b. subordinated
c. convertible
d. redeemable
e. callable

Answer: e. callable

Should Scrubbers decide to redeem the bonds after two years have gone by, each individual bond will be bought back for 

a. $1,020
b. $102
c. $1,000
d. $1,002
e. $981


Answer: a. $1,020

-individual bond has a par value of $1,000 (or $200,000 total par value / the total of 200 bonds issued) will be bought back for $1,020 (or the $1,000 par value of each individual bond x 1.02)

The 10% rate for similar securities on the date of issue is known as the 

a. stated rate
b. par rate
c. market rate
d. coupon rate
e. contract rate

Answer: c. market rate

When scuppers decided to issue the bonds, they would have executed a bond contract, or _____, which spelled out the terms of the bond, and any privileges and covenants.

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

When scuppers decided to issue the bonds, they would have executed a bond contract, or _____, which spelled out the terms of the bond, and any privileges and covenants. 

a. certificate
b. debenture
c. indenture
d. trustee
e. commitment


Answer: c. indenture

The stated rate of interest on the bonds is _____; bondholders will be paid $_____ every _____.

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.

The stated rate of interest on the bonds is _____; bondholders will be paid $_____ every _____. 

a. 9%; $18,000; year
b. 9%; $18,000; six months
c. 9%; $9,000; six months
d. 10%; $10,000; six months
e. 10%; $20,000; year


Answer: c. 9%; $9,000; six months

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102. The par value of the bond issue is

Use the following information to answer the remaining questions. Scuppers Boat Works, Inc. issued 200 bonds to finance expansion into a new line of designs. The bonds had a total principal of $200,000. The bonds will pay interest semiannually on June 30 and December 31 at a rate of 9% per annum and mature in five years. On January 1, 200A, the day the bonds were issued, similar securities were yielding a rate of 10% per annum. Scuppers' underwriter, Reedham and Quip, purchased the entire issue to resell them to individual investors. Scuppers retained the right to buy back the bonds from the bondholders in two years at a price of $102.
The par value of the bond issue is

a. $200,000
b. $18,000
c. $20,000
d. $102,000
e. $192,275


Answer: a. $200,000

Transactions involving bonds would be reported on the statement of cash flows as follows:

Transactions involving bonds would be reported on the statement of cash flows as follows:

a. the issuance of the bonds as a cash inflow from financing activities and the repayment of bond principal upon maturity as a cash outflow from financing activities.
b. the issuance of the bonds as a cash outflow from financing activities and the repayment of bond principal upon maturity as a cash inflow from financing activities
c. the issuance of the bonds as a cash inflow from financing activities and the repayment of a bond principal upon maturity as a cash outflow from investing activities
d. the issuance of the bonds as a cash outflow from financing activities and the repayment of bond principal upon maturity as a cash inflow from investing activities


Answer: a. the issuance of the bonds as a cash inflow from financing activities and the repayment of bond principal upon maturity as a cash outflow from financing activities.

Blazing Lasers Co. retired $400,000 face value of bonds when the discount on bonds payable account had a balance of $32,495. They paid $360,000 to retire the bonds. Blazing Lasers would report a _____ on its income statement.

Blazing Lasers Co. retired $400,000 face value of bonds when the discount on bonds payable account had a balance of $32,495. They paid $360,000 to retire the bonds. Blazing Lasers would report a _____ on its income statement.

a. gain of $72,475
b. loss of $40,000
c. gain of $40,000
d. loss of $7,505
e. a gain of $7,505


Answer: e. a gain of $7,505


-Blazing Lasers Co retired $400,000 face value of bonds when the discount on bonds payable account had a balance of $32,495 (Note that the book value of teh bonds would be $367,505 (or $400,000 - $32,495). They paid $360,000 to retire the bonds) Blazing Lasers would report a gain of $7,505 (or $367,505 - $360,000) on its income statement.

The effective interest method of amortizing discount or premium

The effective interest method of amortizing discount or premium

a. yields a consistent amount of interest, but a different interest rate, each period.
b. is not materially different in most cases from the straight-line method
c. yields a consistent interest rate, but a different amount of interest expense, each period
d. divides the discount or premium into equal amounts for each year of the bonds life
e. calculates interest expense based on the net liability and the coupon interest rate


Answer: c. yields a consistent interest rate, but a different amount of interest expense, each period

When bonds are issued at a premium, interest expense

When bonds are issued at a premium, interest expense 

a. will be equal to cash interest paid each compounding period
b. will be less than the cash interest paid each compounding period
c. will be equal to the amount of premium amortized each period
d. will be more than cash interest paid each compounding period
e. will be calculated based on teh face value of the bond


Answer: b. will be less than the cash interest paid each compounding period

When a bond is issued at a discount

When a bond is issued at a discount

a. the company did not receive as much money as it needed
b. the market rate was lower than the coupon rate
c. the market rate was higher than the stated rate.
d. the company was not able to sell the bonds as easily as they'd anticipated
e. fewer bonds were sold than were offered


Answer: c. the market rate was higher than the stated rate.

A significant advantage for the holders of bonds, as opposed to other debt, is the

A significant advantage for the holders of bonds, as opposed to other debt, is the

a. freedom from risk that is provided by an investment into cash
b. liquidity or ability to convert the investment into cash
c. low cost of such investments
d. high interest rate that is paid
e. convertibility of such an instrument


Answer: b. liquidity or ability to convert the investment into cash

The capital structure of a company is

The capital structure of a company is

a. its property, plant and equipment
b. the mixture of debt and equity used to finance its operations
c. the composition of its stockholders' equity
d. the different types of debt the company has outstanding
e. its management plan


Answer: b. the mixture of debt and equity used to finance its operations

Payments of interest expense on bonds are reported as outflows of cash in the financing section of the statement of cash flows.

Payments of interest expense on bonds are reported as outflows of cash in the financing section of the statement of cash flows.

Answer: False - Cash inflows from the sale of bonds and outflows for the payment of principal on bonds are reported in the financing activities section of the statement of cash flows; however, bond interest payments are directly related to earning income and, as such, are reported in the operating activities section of the statement of cash flows

If bonds do not have a call feature, the issuer of the bonds cannot retire them early.

If bonds do not have a call feature, the issuer of the bonds cannot retire them early.

Answer: False - In some cases, a company may elect to retire debt early by purchasing it on the open market. This approach is necessary when the bonds do not have a call feature.

A call premium, stated as a percentage of par value, is often included in the bond indenture in the event that bonds are retired before their maturity date.

A call premium, stated as a percentage of par value, is often included in the bond indenture in the event that bonds are retired before their maturity date.

Answer: True

A high debt-to-equity ratio suggests that a company relies heavily on funds provided by creditors.

A high debt-to-equity ratio suggests that a company relies heavily on funds provided by creditors.

Answer: True

The debt-to-equity ratio is calculated by dividing total liabilities by owners' equity.

The debt-to-equity ratio is calculated by dividing total liabilities by owners' equity.

Answer: True

The sum of the cash interest payments less the premium on the bond payable on the date of issue is the total interest expense on the bond.

The sum of the cash interest payments less the premium on the bond payable on the date of issue is the total interest expense on the bond.

Answer: True

When a company issues bonds, it tries to set the coupon rate on the bond slightly higher than the market rate so that the bond can be issued at a premium and they will receive more money.

When a company issues bonds, it tries to set the coupon rate on the bond slightly higher than the market rate so that the bond can be issued at a premium and they will receive more money.

Answer: False - Companies try to select a coupon rate that will approximate the market rate that is expected to be in effect on the date of issuance/

Straight-line amortization of discount or premium is simpler, but the effective-interest method is the theoretically preferred method.

Straight-line amortization of discount or premium is simpler, but the effective-interest method is the theoretically preferred method.

Answer: True

The net liability of a bond at any point in in time is the present value of the future cash flows from the bond, discounted at the market interest rate on the date of issue of the bond.

The net liability of a bond at any point in in time is the present value of the future cash flows from the bond, discounted at the market interest rate on the date of issue of the bond.

Answer: True

A zero coupon bond is one on which no periodic cash interest payments are made.

A zero coupon bond is one on which no periodic cash interest payments are made.

Answer: True

A high times interest earned ratio suggests that there is an extra margin of protection in case of deterioration in profitability.

A high times interest earned ratio suggests that there is an extra margin of protection in case of deterioration in profitability.

Answer: True

The times interest earned ratio is computed by dividing net income by interest expense.

The times interest earned ratio is computed by dividing net income by interest expense.

Answer: False - The times interest earned ratio is computed by dividing (net income + interest expense + income tax expense) by interest expense

The underwriter of the bonds determines the price at which the bonds will be sold.

The underwriter of the bonds determines the price at which the bonds will be sold.

Answer: False - neither the issuing company nor the underwriter determines the price at which the bonds sell. Instead, the market determines the price using the market interest rate and present value concepts.

The par value of a bond is minimum legal amount below which teh bond cannot be issued.

The par value of a bond is minimum legal amount below which teh bond cannot be issued.

Answer: False - the par value is the face value of the bond; teh bond might be issued at par, at a premium (above par) or at a discount (below par) depending on the relationship between the coupon rate and the market rate on the date of issuance

An independent trustee is appointed in a bond issue to control the money raised and the payment of interest and principal.

An independent trustee is appointed in a bond issue to control the money raised and the payment of interest and principal.

Answer: False - an independent trustee is appointed to monitor the interest of the bondholders

A debenture is another word for any bond.

A debenture is another word for any bond.

Answer: False - a debenture is an unsecured bond. some bonds are secured by specific assets, and, as such, are not considered debentures

Financial leverage is the ratio of debt to equity financing.

Financial leverage is the ratio of debt to equity financing.

Answer: False - financial leverage is the ability of a company to invest borrowed money at a rate of return higher than their borrowing rate, thus increasing return to stockholders

One disadvantage of bonds compared to stock, for financing a company's operations is that dividends on stock are discretionary, whereas bond interest must be paid.

One disadvantage of bonds compared to stock, for financing a company's operations is that dividends on stock are discretionary, whereas bond interest must be paid.

Answer: True