71. Management has both the intent and the ability to refinance a liability maturing in four months by taking out a new loan at the due date which would not be due for several years. How would this situation be reported in financial statements prepared as of today's date?
A. The original liability is classified as current, with a footnote describing management's plan for refinancing.
B. The original liability is classified as current and the new loan is reported as a long-term liability.
C. The original liability is classified as long-term; the new loan is not included in liabilities at this date.
D. The original liability need not be reported at all; only the new loan is reported as a long-term liability.
72. Temple Corporation purchased a piece of real estate, paying $400,000 cash and financing $700,000 of the purchase price with a 10-year, 15% installment note. The note calls for equal monthly payments that will result in the debt being completely repaid by the end of the tenth year. In this situation:
A. The aggregate amount of the monthly payments is $700,000.
B. Each monthly payment is greater than the amount of interest accruing each month.
C. The portion of each payment representing interest expense will increase over the 10-year period, since principal is being paid off, yet the payment amount does not decrease.
D. The portion of each monthly payment representing repayment of principal remains the same throughout the 10-year period.
73. When an installment note is structured as a "fully amortizing" loan with equal monthly payments (such as a traditional mortgage):
A. The portion of each payment allocated to interest expense is the same each month.
B. The sum of the monthly payments is equal to the amount of the installment note (mortgage).
C. The difference between the sum of all monthly payments and the principal amount of the note constitutes interest.
D. The portion of each payment allocated to repayment of principal decreases each month as the mortgage is paid off.
74. In relation to a bond issue, the role of the underwriter is to:
A. Guarantee payment to bondholders of both the periodic interest payments and the maturity value.
B. Purchase the entire bond issue from the issuing corporation and then sell the bonds to the public.
C. Represent the interests of the bondholders and, if necessary, to take legal action on their behalf.
D. Maintain a subsidiary ledger of individual bondholders and mail out the periodic interest checks.
75. If a bond is issued at par and between interest dates:
A. The cash received by the corporation will be less than the face value of the bond.
B. The cash received by the corporation will be greater than the face value of the bond.
C. The cash received by the corporation will be the same as the face value of the bond.
D. Interest receivable will be debited.
76. The term "junk bonds" describes bonds with:
A. Low interest rates.
B. Indefinite maturity dates.
C. Low maturity values.
D. High risk.
77. One advantage of issuing bonds instead of stock is that:
A. Interest is tax deductible whereas dividends are not.
B. Bonds have a longer maturity date.
C. Interest rates are lower than dividend rates.
D. The issuance of bonds does not affect earnings per share.
78. Choose the statement that correctly summarizes the tax advantage of raising money by issuing bonds instead of common stock:
A. The amount paid by the corporation to redeem bonds at maturity date is deductible in computing income subject to corporate income tax.
B. Interest payments are deductible in determining income subject to corporate income tax; dividends are not deductible.
C. A corporation must pay tax on the sales price of stock issued, but is not taxed on the amount received when bonds are issued.
D. Both interest and dividends paid are deductible in computing taxable income, but since interest must be paid annually, the corporation usually gets a larger tax deduction over the life of the bonds payable.
79. Elm Corporation plans to invest $300 million to earn about 15% before income taxes. The company is considering whether it should raise the $300 million by issuing 10% bonds payable or capital stock. If the company issues the bonds, it will probably report:
A. Lower net income and lower income taxes expense than if it issues capital stock.
B. Higher net income and higher income taxes expense than if it issues capital stock.
C. Lower net income and higher income taxes expense than if it issues capital stock.
D. Higher net income and lower income taxes expense than if it issues capital stock.
80. The current portion of long-term debt should be reported:
A. Separately in the long-term liabilities section of the balance sheet.
B. In the long-term liabilities section of the balance sheet, along with the other long-term debt.
C. In the current liabilities section of the balance sheet.
D. In a separate section of the balance sheet, between long-term liabilities and shareholders' equity.