Multiple Choice
Identify the choice that best completes the statement or answers the
question.
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1.
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From the standpoint of the issuing company, a disadvantage of using bonds as a
means of long-term financing is that
a. | bond interest is deductible for tax purposes. | b. | interest must be
paid on a periodic basis regardless of earnings. | c. | income to shareholders may increase as a result
of trading on the equity. | d. | the bondholders do not have voting
rights. |
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2.
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If a corporation issued $4,000,000 in bonds which pay 5% annual interest, what
is the annual net cash cost of this borrowing if the income tax rate is 30%?
a. | $2,000,000. | b. | $60,000. | c. | $200,000. | d. | $140,000. |
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3.
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Shareholders of a company may be reluctant to finance expansion through issuing
more equity because
a. | leveraging with debt is always a better idea. | b. | their earnings per
share may decrease. | c. | the price of the shares will automatically
fall. | d. | dividends must be paid on a periodic basis. |
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4.
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Which of the following is not an advantage of issuing bonds instead of
common shares?
a. | Shareholder control is not affected. | b. | Earnings per share may be
higher. | c. | Income to common shareholders may increase. | d. | Tax savings
result. |
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5.
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The contractual rate of interest is always stated as a(n)
a. | monthly rate. | b. | daily rate. | c. | semi-annual
rate. | d. | annual rate. |
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6.
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The present value of a bond is also known as its
a. | face value. | b. | market price. | c. | future
value. | d. | deferred value. |
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7.
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If the market rate of interest is greater than the contractual rate of interest,
bonds will sell
a. | at a premium. | b. | at face value. | c. | at a
discount. | d. | only after the stated rate of interest is increased. |
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8.
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The interest expense recorded on an interest payment date is
increased
a. | by the amortization of premium on bonds payable. | b. | by the amortization
of discount on bonds payable. | c. | only if the bonds were sold at face
value. | d. | only if the market rate of interest is less than the stated rate of interest on that
date. |
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9.
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If the market rate of interest is 5%, a $10,000, 6%, 10-year bond that pays
interest semi-annually would sell at an amount
a. | less than face value. | b. | equal to the face value. | c. | greater than face
value. | d. | that cannot be determined. |
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10.
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The carrying value of bonds will equal the market price
a. | at the close of every trading day. | b. | at the end of the fiscal
period. | c. | on the date of issue. | d. | every six months on the date interest is
paid. |
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11.
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Over the term of the bonds, the balance in the Discount on Bonds Payable account
will
a. | fluctuate up and down if the market is volatile. | b. | decrease. | c. | increase. | d. | be unaffected until
the bonds mature. |
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12.
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In the balance sheet, the account, Premium on Bonds Payable, is
a. | added to bonds payable. | b. | deducted from bonds
payable. | c. | classified as a shareholders' equity account. | d. | classified as a
revenue account. |
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