All of the following are primary sources of long-term debt financing for companies, except _____.

• leases
• stock issues
• bonds
• notes

Paying dividends to stockholders reduces taxable income because dividends are an expense.

True or False

In an installment note, a portion of each installment payment goes towards interest, and the remaining portion represents a reduction of the outstanding loan balance.

True or False

In the case of installment notes, interest expense is calculated as a constant percentage of the carrying value.

True or False

The entry to record monthly installment payments includes a credit to Notes Payable.

True or False

A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time.

True or False

Carrington Company agrees to make lease payments of $309.32 at the end of each month for 60 months for the use of equipment. The present value of the 60 lease payments using a 6% borrowing rate is $16,000. Total interest expense over the term of the lease is:

• $309
• $960
• $2,559
• $16,000

Greenfield, Inc. agrees to make lease payments of $220 at the end of each month for 48 months for the use of a machine. Assuming a borrowing rate of 12%, the present value of the lease payments is:

• $1,825
• $8,354
• $9,429
• $10,560

Interest on bonds is traditionally paid:

• once per year.
• twice per year.
• once per month.
• every day.

In comparing bonds with notes, bonds are typically issued to a single lender while notes are issued to many lenders.

True or False

Bonds that are not supported by specific assets but instead backed only by the "full faith and credit" of the issuing company are known as:

• secured bonds.
• serial bonds.
• term bonds.
• unsecured bonds.

Bonds that require payment of the full principal at a single maturity date are known as term bonds.

True or False

Most bonds require payment of the full principal at a single maturity date.

True or False

On January 1, Year 1, Greenbriar Corporation issues callable bonds at face amount that pay 8% interest. The company is most likely to call the bonds if the market interest rate:

• remains constant at 8%.
• increases to a rate above 8%.
• decreases to a rate below 8%.

An investor owns a $1,000 convertible bond that can be converted into 10 shares of common stock. The investor should exercise this conversion feature when the company's stock price is:

• exactly $100.
• more than $100.
• less than $100.

On January 1, Year 1, McGee Corporation issues 5%, 10-year bonds with a face amount of $100,000. Interest is paid semiannually on June 30 and December 31. On issuance date, the market rate of interest is 5%; therefore, the issue price of the bonds is $100,000. The journal entry for the issuance of the bonds will include a:

• debit to Bonds Payable for $105,000
• debit to Cash for $105,000
• credit to Bonds Payable for $100,000
• credit to Cash for $100,000

On January 1, Year 1, McGee Corporation issues 5%, 10-year bonds with a face amount of $100,000. On issuance date, the market rate of interest is 5%; therefore, the issue price of the bonds is $100,000. Interest is paid semiannually on June 30 and December 31. The first payment of interest on June 30 will include a:

• debit to Interest Expense for $2,500
• debit to Interest Expense for $5,000
• credit to Bonds Payable for $2,500
• credit to Bonds Payable for $5,000

The rate of interest specified in a bond contract as the interest rate to be paid by the company to investors in the bond is known as the market rate.

True or False

When a bond's stated rate of interest is more than the market rate of interest, the bonds will issue:

• at face amount.
• at more than face amount.
• at less than face amount.

Wylie Company issues $100,000 of 5% bonds when the market rate of interest is 6%. These bonds will issue:

• at face amount.
• at a premium.
• at a discount.

A bond will issue at a discount when:

• the market rate of interest is more than the stated rate of interest.
• the market rate of interest is less than the stated rate of interest.
• the market rate of interest is equal to the stated rate of interest.

Windsor, Inc., issues 7%, 10-year bonds with a face amount of $1 million on January 1, Year 1, for $932,048, when the market rate of interest is 8%. Interest expense associated with this bond for the first semiannual period is:

• $32,622
• $35,000
• $37,282
• $40,000

The amortization schedule for a bond issued at a discount has a carrying value that increases over time.

True or False