101. If a company uses the effective interest method of amortizing a bond discount, the interest expense that is recognized each year
A. will be greater than the interest payment.
B. will increase from year to year.
C. will remain the same from year to year.
D. will be greater than the interest payment and also will increase from year to year.
102. If a company uses the effective interest method of amortizing a bond premium, the carrying value of the bond
A. will decrease by equal amounts each year.
B. will decrease by smaller amounts each year.
C. will decrease by larger amounts each year.
D. will be lower than the face value of the bond until maturity.
103. Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?
A. Not having to pay back the principal.
B. Ability to raise large amounts of capital.
C. Tax-deductibility of interest.
D. Tax-deductibility of dividends.
104. The times-interest-earned ratio is calculated by which of the following?
A. Total assets divided by interest expense.
B. Net income divided by interest expense.
C. Earnings before interest and taxes divided by interest expense.
D. None of these answer choices is correct.
105. Company A and Company B are identical in all regards except that during 2016 Company A borrowed $40,000 at an interest rate of 10%. In contrast, Company B obtained financing by acquiring $40,000 from sale of common stock. Company B agreed to pay a $4,000 cash dividend each year. Both companies are in a 30% tax bracket. Which company would show the greater retained earnings at the end of 2016, and by what amount?
A. Company A's retained earnings would be higher by $4,000.
B. Company B's retained earnings would be higher by $2,800.
C. Company A's retained earnings would be higher by $1,200.
D. Both would show the same retained earnings.
106. On January 1, 2016 Brown Co. issued $200,000 of 10%, 20-year bonds. If Bluefield's tax rate is 40%, the after-tax cost of borrowing related to these bonds for 2016 is:
A. $12,000.
B. $8,000.
C. $20,000.
D. $28,000.
107. Which of the following conditions indicate a company has a relatively high level of financial risk?
A. A low times interest earned ratio.
B. A low debt to assets ratio.
C. A high return on equity.
D. A high current ratio.
108. Gates, Inc. and Markham, Inc. each had the same financial position on January 1, 2016. The following is a summary of each of their balance sheets as of January 1, 2016:
109. Thrasher Company reported income before taxes of $180,000. The company is in a 30% income tax bracket. Also, Thrasher's income statement contained a charge for interest expense amounting to $60,000. Based on this information alone, the company's times interest ratio would be:
A. 2.1.
B. 3.0.
C. 3.1.
D. 4.0.
110. On January 1, 2016, Carlyle Corporation issued a five-year term note. The note requires an annual cash payment on December 31 of each year. The payment includes a principal reduction and interest. Indicate whether each of the following statements is true or false.
_____ a) The entry to record issuance of the note will increase assets and liabilities.
_____ b) The first payment on the note will reduce liabilities and assets, but will not affect equity.
_____ c) The second payment on the note will include higher interest expense than did the first payment.
_____ d) Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities.
_____ e) The amount of reduction in liabilities will increase with each succeeding payment.