Principles of Accounting II: Chapters 15 and 16
Chapter 15
1. One potential advantage of financing corporations through the use of bonds rather than common
stock is
a. the interest on bonds must be paid when due.
b. the corporation must pay the bonds at maturity.
c. the interest expense is deductible for tax purposes by the corporation.
d. a higher earnings per share is guaranteed for existing common shareholders.
2. When the maturities of a bond issue are spread over several dates, the bonds are called
a. serial bonds
b. bearer bonds
c. debenture bonds
d. term bonds
3. If the market rate of interest is 6%, the price of 8% bonds paying interest semiannually with a face
value of $100,000 will be
a. Equal to $100,000
b. Greater than $100,000
c. Less than $100,000
d. Greater than or less than $100,000, depending on the maturity date of the bonds
4. The present value of $40,000 to be received in one year, at 6% compounded annually, is (rounded to
nearest dollar)
a. $37,736
b. $42,400
c. $40,000
d. $2,400
5. The present value of $30,000 to be received in two years, at 12% compounded annually, is (rounded
to nearest dollar)
a. $23,916
b. $37,632
c. $23,700
d. $30,000
6. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at
a. a premium
b. their face value
c. their maturity value
d. a discount
7. A corporation issues for cash $8,000,000 of 8%, 30-year bonds, interest payable semiannually. The
amount received for the bonds will be
a. present value of 60 semiannual interest payments of $320,000, plus present value of
$8,000,000 to be repaid in 30 years
b. present value of 30 annual interest payments of $640,000
c. present value of 30 annual interest payments of $640,000, plus present value of $8,000,000 to
be repaid in 30 years
d. present value of $8,000,000 to be repaid in 30 years, less present value of 60 semiannual
interest payments of $320,000
8. When the market rate of interest was 12%, Newman Corporation issued $1,000,000, 11%, 10-year
bonds that pay interest annually. The selling price of this bond issue was
a. $ 321,970
b. $1,000,000
c. $ 943,494
d. $621,524
9. Two companies are financed as follows:
Bonds payable, 9% issued at face
Common stock, $20 par
X Co.
$5,000,000
3,000,000
Y Co.
$3,000,000
3,000,000
Income tax is estimated at 40% of income.
Determine for each company the earnings per share of common stock, assuming that the income
before bond interest and income taxes is $1,500,000 each.
X Co.
Y Co.
Earnings before interest and taxes
Deduct interest on bonds
Income before income tax
Deduct income tax
Net income
==========
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Earnings per share on common stock
10. (a)
(b)
Prepare the journal entry to issue $200,000 bonds which sold for $195,000.
Prepare the journal entry to issue $200,000 bonds which sold for $204,000.
(a)
(b)
Chapter 16
11. On the statement of cash flows, the cash flows from operating activities section would include
a. receipts from the issuance of capital stock
b. receipts from the sale of investments
c. payments for the acquisition of investments
d. cash receipts from sales activities
12. Cash paid to purchase long-term investments would be reported in the statement of cash flows in
a. the cash flows from operating activities section
b. the cash flows from financing activities section
c. the cash flows from investing activities section
d. a separate schedule
13. Which of the following does not represent an outflow of cash and therefore would not be reported on
the statement of cash flows as a use of cash?
a. purchase of noncurrent assets
b. purchase of treasury stock
c. discarding an asset that had been fully depreciated
d. payment of cash dividends
14. A ten-year bond was issued at par for $150,000 cash. This transaction should be shown on a
statement of cash flows under
a. investing activities
b. financing activities
c. noncash investing and financing activities
d. operating activities
15. A company purchases equipment for $29,000 cash. This transaction should be shown on the
statement of cash flows under
a. investing activities
b. financing activities
c. noncash investing and financing activities
d. operating activities
16. Which of the following should be deducted from net income in calculating net cash flow from
operating activities using the indirect method?
a. depreciation expense
b. amortization of premium on bonds payable (results in a decreased interest expense)
c. a loss on the sale of equipment
d. dividends declared and paid
17. Which one of the following below would not be classified as an operating activity?
a. interest expense
b. income taxes
c. payment of dividends
d. selling expenses
18. The following information is available from the current period financial statements:
Net income .................................... $140,000
Depreciation expense ..................... 28,000
Increase in accounts receivable ....... 16,000
Decrease in accounts payable ......... 21,000
The net cash flow from operating activities using the indirect method is
a. $131,000
b. $163,000
c. $107,000
d. $205,000
19. On the basis of the following data for Teller Co. for 2006 and the preceding year ended December 31,
2005, prepare a statement of cash flows. Use the indirect method of reporting cash flows from
operating activities. Assume that equipment costing $125,000 was purchased for cash and
equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000; that
the stock was issued for cash; and that the only entries in the retained earnings account were net
income of $51,000 and cash dividends declared of $13,000.
Year
Year
2006
2005
Cash
$100,000
$ 78,000
Accounts receivable (net)
78,000
85,000
Inventories
101,500
90,000
Equipment
410,000
370,000
Accumulated depreciation
(150,000)
(158,000)
$539,500
$465,000
Accounts payable (merchandise creditors)
Cash dividends payable
Common stock, $10 par
Paid-in capital in excess of par-common stock
Retained earnings
Teller Co.
Statement of Cash Flows
For Year Ended December 31, 2006
$ 58,500
5,000
200,000
$ 55,000
4,000
170,000
62,000
214,000
$539,500
60,000
176,000
$465,000