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Practice Questions for Quiz 6 (Module 7) Financial Accounting
Terms in this set (13)
PV of Face Amount = $3MM * 0.2584 = 775,200
PV of Annuity = 180,000*10.5940 = 1,906,920
Total PV = $2,682,180 (rounded)
On January 1, a company issued $3,000,000 of 10-year bonds with a coupon rate of 12% payable semi-annually on June 30 and December 31. The market rate was 14% on the issuance date. What is the issuance price of the bonds (rounded to the nearest dollar)?
PV of a Sum for 20 periods at 6% per period = 0.3118
PV of a Sum for 20 periods at 7% per period = 0.2584
PV of an Annuity for 20 periods at 6% per period = 11.4699
PV of an Annuity for 20 periods at 7% per period = 10.5940
Stated rate, nominal rate, coupon rate
The annual interest rate specified on a bond (which is based on the maturity amount of the bond) appropriately can be called the:
The company had more creditor financing versus stockholder equity financing in 2019 than in 2018.
2019 / 2018 amounts
Total Assets 8,003 / 8,353
Total Liabilities 4,515 / 4,673
Total Equity 3,488 / 3,680
Debt/Equity Ratio 1.294 / 1.270.
The debt to equity ratio went up from 1.27 in 2018 to 1.29 in 2019. A debt to equity ratio of 1.29 means that more than half of the company's financing came from debt.
In 2019, Baginski Inc. had total liabilities of $4,515 million and total assets of $8,003 million. In 2018, its total liabilities were $4,673 million and total assets were $8,353 million. Which of the following statements is TRUE?
Bonds sell at a premium when the market rate of interest is less than the stated rate. Because the bonds were originally issued at par (face) value, the market and stated interest rates must have been the same on the date of issuance, and, therefore, the market interest rate must have decreased.
Philips Corporation issued (sold) $50,000,000 of its 10% bonds at par on January 1 of the current year. On December 31, the current year-end, the bonds were trading on the bond exchange at $51,000,000. Since the issue date, the market rate of interest has:
decrease interest expense.
Amortization of bond premium decreases interest expense. (Amortization of bond discount increases interest expense.)
The amortization of bond premium by the issuer will:
19.4 and 14.8 times
2019: (2,662 + 1,367 + 219) / 219 = 19.4.
2018: (2,543 + 1,218 + 272) / 272 = 14.8
In 2019, the Lynn Co. reported net income of $2,662 million, interest expense of $219 million and income tax expense of $1,367 million. In 2018, Lynn reported net income of $2,543 million, interest expense of $272 million and income tax expense of $1,218 million. Calculate the times interest earned ratio for 2019 and 2018, respectively.
$9,668 x 8% = $773.44.
On January 1 of the current year, Winston Corporation sold a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate at the time of issuance. Assuming effective-interest amortization is used, the interest expense on the current year income statement ended December 31 would be (to the nearest dollar):
Increase Assets, Increase liabilities
On January 1, a company issued $2 million 20-year bonds with a coupon rate of 4% payable semi-annually. The market rate of interest was 5% on the issuance date. The issuance price based on this information was $1,748,972. How should this transaction be reflected in the accounting equation?
$1,752,696. The carrying value of a bond issued at a discount increases by the amount of the amortized discount.
The amount of discount amortized = Interest Expense - Coupon Payment
Interest Expense: $1,748,972* 2.5% = $43,724
Coupon Payment: $2MM ^ 2% = $40,000
Amortized discount: $43,724-$40,000 = $3,724
Carrying Value after 1st payment: $1,748,972 +$3,724 = $1,752,696
On January 1, a company issued $2 million 20-year bonds with a coupon rate of 4% payable semi-annually. The market rate of interest was 5% on the issuance date. The issuance price based on this information was $1,748,972. What is carrying value of the bonds after the first payment was made?
Liabilities increase by $3,724. Since amortized discount increases the carrying value of the bonds, long-term debt increased by $3,724 (2.5%
$2MM) = $3,724.
On January 1, a company issued $2 million 20-year bonds with a coupon rate of 4% payable semi-annually. The market rate of interest was 5% on the issuance date. The issuance price based on this information was $1,748,972.
How does the first payment affect the accounting equation?
Liabilities decrease by $5,513. For bonds issued at premium, the carrying value decreases by the amortized premium.
Amortized premium = Coupon Payment - Interest Expense
Coupon Payment = 2%*2MM = $40,000
Interest Expense = Market Rate * Opening Carrying Value
= 1.5% * $2,299,158 = $34,487
Amortized Premium = $5,513
On January 1, a company issued $2 million of 20-year bonds with a coupon rate of 4% payable semi-annually. The market rate of interest was 3% on the issuance date. The issuance price based on this information was $2,299,158.
How does the first payment affect the accounting equation?
This is not a problem if it used the debt profitably.
For a firm with an increase in its debt-to-equity ratio, which of the following is true?
Times Interest Earned Ratio=NI+Int Exp+Inc Tax Exp/Int Exp
=(200+32+25)/32 = 8.03
A company had the following information for its most recent fiscal year:
Net income: $200
Interest expense: $32
Income tax expense: $25
What is the company's times interest earned for its most recent fiscal year?
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