Accounting Midterm Exam ACG-2011: Question 96

A company must repay the bank a single payment of $21,000 cash in 2 years for a loan it entered into. The loan is at 10% interest compounded annually. The present value factor for 2 years at 10% is 0.8264. The present value of the loan (closest to) is:

	$17,354.
	$25,200.
	$16,800.
	$21,000.
	$18,900.

$21,000 × 0.8264 = $17,354

Accounting Midterm Exam ACG-2011: Question 92

A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuity for 7 years at 9% is 5.0330. The present value of the loan is:

	$45,297.
	$5,033.
	$63,000.
	$9,000.
	$57,330.

$9,000 x 5.0330= $45,297

Accounting Midterm Exam ACG-2011: Question 90

Amortizing a bond discount:

	Allocates a portion of the total discount to interest expense each interest period.
	Decreases the Bonds Payable account.
	Decreases interest expense each period.
	Increases cash flows from the bond.
	Increases the market value of the Bonds Payable.

Accounting Midterm Exam ACG-2011: Question 89

Pitt Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?

	Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
	Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
→	Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
	Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
	Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.

Current Situation:	Total Assets = Total Liabilities + Stockholders' Equity
	35,000,000    =   17,500,000    +   17,500,000
	Debt-to-equity ratio = 17.5 / 17.5 or 1.0.
If debt is issued:	Total Assets = Total Liabilities + Stockholders' Equity
	40,000,000   =   22,500,000    +  17,500,000
	Debt-to-equity ratio = 22.5 / 17.5 or 1.3.

Accounting Midterm Exam ACG-2011: Question 88

Which of the following statements is True?

	Bonds always increase return on equity.
	Bonds do not have to be repaid.
	Interest on bonds is not tax deductible.
	Dividends to stockholders are tax deductible.
	Interest on bonds is tax deductible.

Accounting Midterm Exam ACG-2011: Question 86

A company issues at par 9% bonds with a par value of $100,000 on April 1. The bonds pay interest semi-annually on January 1 and July 1. The cash received on July 1 by the bond holder(s) is:

	$6,000.
	$1,500.
	$7,500.
	$3,000.
→	$4,500.

$100,000 x .09 x 1/2 year = $4,500

Accounting Midterm Exam ACG-2011: Question 83

A bond sells at a discount when the:

	Contract rate is below the market rate.
	Bond has a short-term life.
	Bond pays interest only once a year.
	Contract rate is above the market rate.
	Contract rate is equal to the market rate.