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标题: CFA Level I:FSA : Non-current (long-term) liabilities(Reading 32) 习题精选 [打印本页]

作者: cityboy 时间: 2013-9-23 15:07 标题: CFA Level I:FSA : Non-current (long-term) liabilities(Reading 32) 习题精选

1. A company with no interest-bearing debt enters into a finance lease on the first day on the reporting year. The lease requires a year-end payment of $175,000 for 10 years. In the second year of the lease, the company reported the EBIT of $450,000. Assuming a 7% imputed interest rate on the lease, the firm’s interest coverage ratio in the second year is closest to:
A. 4.3X
B. 5.2X
C. 5.6X

Ans: C.
The present value of the lease payment with an anunual payment of $175,000 (PMT) at the end of the year over the 10 year period (N), discounted at 7% (1/Y), is $1,229,127 (solve for PV).

	PMT	INT	Principal	Carry value
0				$1,229,127
1	$175,000	$86,039	$88,961	$1,140,166
2	$175,000	$79,812	$95,188

Interest during the second year of the lease is $1,140,166 * 0.07= $79,812.

作者: cityboy 时间: 2013-9-23 15:07

2. An analyst is assessing a company that entered into a take-or-pay contract during the year and also has significant number of operating leases. Which of the following statement is the least accurate?
A. The company’s financial statements must be adjusted before the analyst compares this company to other companies in its industry.
B. Despite the off-balance sheet nature of take-or-pay contracts and operating leases, an attempt to determine the actual financial position of the company can be garnered from the footnotes.
C. The take-or-pay contracts and operating leases mean that this company has much higher business risk than similar companies that do not use off-balance sheet financing techniques.

Ans. C.
The existence of take-or-pay contracts and operating leases does not necessarily increase the business risk of a company when compared to companies that do not use off-balance seet financing techniques, although the existence of the obligations must be considered when analyzing business risk.

A is incorrect. When companies make use of off-balance sheet financing techniques, the financial statements must be adjusted before the company’s financing position and operating results can be analyzed and compared to other companies.

C is incorrect. It is not difficult to determine the true financial position of companies that use off-balance sheet financing techniques because both IFRS and U.S.GAAP require extensive footnote disclosures regarding off-balance sheet financing. The information in the disclosures can be used to adjust the financial statements for the off-balance sheet items.

作者: cityboy 时间: 2013-9-23 15:07

3. A company leased equipment under a seven-year finance lease requiring year-end payments of $20,541. The present value of the lease liability is approximately $100,000 based on a 10% discount rate. The interest portion of the first payment is closest to:
A. $10,000.
B. $13,340.
C. $14,200.

Ans: A.
First year interest expense will be:
1st year interest expense= $100,00 *0.10= $10,000.

作者: cityboy 时间: 2013-9-23 15:07

4. The most likely impact on a lessee’s financial statements from reporting a lease as a finance lease rather than as an operating lease will be:
A. Unchanged total lease expense over the lease term.
B. Lower operating cash flows during the life of the finance lease.
C. Lower operating profit (margin) in the early years of the finance lease.

Ans. A.
Although the annual lease expense in any given year is different between an operating and a finance lease, over the life of the lease (lease term) both methods will result in the same total lease expense.

B is incorrect. Under a finance lease, only the interest payments are outflows from operating activities, while the principal payments are outflows from financing activities. All operating lease payments are outflows from operating activities, resulting in lower operating cash flows during the lease term if the lease is an operating lease.

C is incorrect. Operating profit margins are higher (rather than lower) during the entire term of a finance lease because only the related depreciation expense, rather than the entire lease payment is included in operating expenses. However, the interest portion of the payment is reflected in pretax earnings and net profit margins, both of which will be lower in the early years of a fiancé lease as the combined deprecation and interest expense will be in excess of the lease payment.

作者: cityboy 时间: 2013-9-23 15:08

5. Backhoe Partners (BP) sells each of its backhoes for $175,000 with an expected economic life of 10 years. The company also leases them directly to construction companies with good credit. If Construction Group (CG) leases the equipment from BP, the relevant interest rate is 10% and the lease payments will be $4,000 per month for four years. CG has purchased equipment in the past by financing through Prime Finance. Assuming that CG decides to lease the equipment, BP should treat the lease as a(n):
A. Direct financing lease.
B. Operating lease.
C. Sales-type lease.

And. C.
The lease must be capitalized since the present value of the lease payment is greater than 90% of the fair value of the asset:
$4,000 PMT, 10%/12 i (1/Y), 4*12 n (N), (CPT) PV = $157,713
$157,713/$175,000 =90.12%

A. The lease would not direct financing lease because BP manufactures the equipment and leases it to third parties; BP is obviously a manufacturer or dealer.

B. Since BP manufactures the equipment for sale, the lease would be a sales-type lease.

作者: cityboy 时间: 2013-9-23 15:11

6. When a bondholder converts a convertible bond, the effects on the corporation’s subsequent financial statements will include a:
A. An increase in tax expense and an increase to the debt-to-equity ratio.
B. An increase in tax expense and a decrease to the debt-to-equity ratio.
C. A decrease in tax expense and an increase to the debt-to-equity ratio.

Ans: B.
Since interest is tax deductible, it will decrease tax expense while the bonds are outstanding. When the debt is converted to equity, the reduced interest deduction will increase tax expense. When the debt is converted to equity, the numerator of the debt-to-equity ratio will be reduced and the denominator will be increased. The debt-to-equity ratio will be reduced as a result.

作者: cityboy 时间: 2013-9-23 15:11

7. A company is considering issuing $10,000,000 of long-term debt with a 6% coupon rate or the same amount of convertible debt with a 5% coupon rate. Both will be issued at par and have the same maturity. Which statement below best describes the impact on the firm’s debt ratio?
A. The debt ratio would be higher for U.S.GAAP than for IFRS.
B. The debt ratio would be lower for U.S.GAAP than for IFRS.
C. The debt ratio would be the for U.S.GAAP than for IFRS.

Ans: A.
Under U.S.GAAP the entire amount of the issue is recorded as debt while under IFRS the amount of the issue is split into the fair value of the debt and the difference between fair value and issue value is recorded as (option) equity.

作者: cityboy 时间: 2013-9-23 15:11

8. The following information is available from a company’s 2011 financial statements:
Note 6: Employee costs

(in thousands)	2011	2010
Wages and salaries	$21,000	$18,500
Share-based payment costs	600	425
Defined contribution pension plan	1,525	1,462
Retirement benefit obligations (note 17)	728	620
Other employee costs	3,233	3,080
Total employee costs	$27,086	$24,087

Note 17: Retirement benefit obligations
Amounts recognized in the income statement for the year

(in thousands)	2011	2010
Current service cost	$692	$588
Interest cost on pension obligation	80	65
Expected return on plan assets	(50)	(45)
Past service costs recognized in the year	6	12
Total income statement charge	$728	$620

The pension expense (in thousands) reported in 2011 is closest to:
A. $1,525.
B. $2,217.
C. $2,253.

Ans: C.
The pension expense would be the sum of the expense for the defined contribution plan and the defined benefit plan (retirement benefit obligation): 1,525 + 728 = 2,253.

作者: cityboy 时间: 2013-9-23 15:11

9. A retail company that leases the majority of its space has:
? total assets of $4,500 million,
? total long-term debt of $2,125 million, and
? average interest rate on debt of 12%.
Note 8 to the 2011 financial statements contains the following information about the company’s future beginning of year lease commitments:
Note 8: Operating leases

Year	Millions
2012	$200
2013	200
2014	200
2015	200
2016	200
total	$1,000

After adjustment for the off-balance-sheet financing, the debt-to-total-assets ratio for the company is closest to:
A. 55%.
B. 57%.
C. 65%.

Ans: A.
The present value of the operating leases should be added to both the total debt and the total assets.
The present value of an annuity due of $200 for 5 years at 12% = $807.5.
(N = 5; I = 12; PMT = 200; Mode = Begin)
Adjusted debt to total assets = (2,125 + 807.5) ÷ (4,500 + 807.5) = 55.3%.

作者: cityboy 时间: 2013-9-23 15:12

10. On 1 January 2009, a company that prepares its financial statements according to IFRS issued bonds with the following features:
? Face value ￡20,000,000
? Term 5 years
? Coupon rate 6% paid annually on December 31
? Market rate at issue 4%
The company did not elect to carry the bonds at fair value. In December 2011 the market rate on similar bonds had increased to 5% and the company decided to buy back (retire) the bonds after the coupon payment on December 31. As a result, the gain on retirement reported on the 2011 statement of income is closest to:
A. ￡340,410.
B. ￡371,882.
C. ￡382,556.

Ans. C.
The market value of debt at retirement can be determined by discounting the future cash flows at the current market rate (5%) using a financial calculator:
FV = 20,000,000; i = 5%; PMT = 1,200,000; N = 2; Compute PV = 20,371,882
The book value after the third interest payment (two payments remaining) can be found either using a financial calculator and the market rate at the time of issue (4%) or an amortization table (shown below).
FV = 20,000,000; i = 4%; PMT = 1,200,000; N = 2; Compute PV = 20,754,438.
The bond’s initial value (required for amortization) can be found using a financial calculator:
FV = 20,000,000; i = 4%; PMT = 1,200,000; N = 5; Compute PV = 21,780,729.

	Principal value at beginning of year	Interest expense 4%	Coupon 6%	Discount amortization
2009	21,780,729	871,229	1,200,000	328,771
2010	21,451,958	858,078	1,200,000	341,922
2011	21,110,036	844,401	1,200,000	355,599
Book value at end of 2011=21,110,036-355,599=20,754,438

Gain=Book value of debt – Market value
= 20,754,438 – 20,371,882 =382,556

作者: cityboy 时间: 2013-9-23 15:12

11. Which of the following is most likely a reason that a lessor can offer attractive lease terms and lower cost financing to a lessee? Because the:
A. Lessor retains the tax benefits of ownership.
B. Lessor avoids reporting the liability on its balance sheet.
C. Lessee is better able to resell the asset at the end of the lease.

Ans: A.
The lessor often retains the tax benefits of ownership of the leased asset, which allows the lessor to pass those savings along to the lessee in the form of lower financing costs or other attractive terms.
B is incorrect. Lessor owns the asset.
C is incorrect. The lessee does not own the asset.

作者: cityboy 时间: 2013-9-23 15:12

12. On 1 January 2011 the market rate of interest on a company’s bonds is 5% and it issues a bond with the following characteristics:

Face value	€50 million
Coupon rate, paid annually	4%
Time to maturity	10 years (31 December 2020)
Issue price (per €100)	92.28

If the company uses IFRS, its interest expense (in millions) in 2011 is closest to:
A. €1.846.
B. €2.307.
C. €2.386.

Ans: B.
IFRS requires the effective interest method for the amortization of bond discounts/premiums. The bond is issued for 0.9228 × €50 million = €46.140.
Interest expense
= Liability value × Market rate at issuance
= 0.05 × €46.140 = €2.307.

作者: cityboy 时间: 2013-9-23 15:12

13. Given the following information about a company:

(€ millions)	2011	2010
Short-term borrowings	2,240	5,400
Current portion of long-term interest bearing debt	2,000	1,200
Long-term interest bearing debt	12,000	9,000
Total shareholders’ equity	23,250	21,175
EBIT	3,850	3,800
Interest payments	855	837
Operating lease payments	800	800

What is the most appropriate conclusion an analyst can make about the solvency of the company? Solvency has:
A. improved because the debt-to-equity ratio decreased.
B. deteriorated because the debt-to-equity ratio increased.
C. improved because the fixed charge coverage ratio increased.

Ans: A.
The debt–equity ratio decreased, thereby improving solvency; the fixed charge ratio remained the same.

	2011	2010	Comments
Debt-to-equity ratio =	=70%	=74%	Ratio decreased: Company has less financial risk; more solvent
Fixed charge coverage ratio =	=2.81	=2.81	No change in FCC ratio

作者: cityboy 时间: 2013-9-23 15:13

14. A company, which prepares its financial statements in accordance with IFRS issues ￡5,000,000 face value ten year bonds on January 1, 2010 when interest rates are 5.50%. The bonds carry a coupon of 6.50%, with interest paid annually on December 31. The carrying value of the bonds as of December 31, 2011 will be closest to:
A. ￡4,695,562.
B. ￡5,301,000.
C. ￡5,316,000.

Ans: C.
The bond proceeds are determined by taking the present value of the coupon stream and terminal payment at the interest rate of 5.5%:
Proceeds
= 5,000,000 x 6.5% x PVA(10y, 5.5%) + 5,000,000 x PV(10y, 5.5%)
= 325,000 x PVA(10y, 5.5%) + 5,000,000 x PV(10y, 5.5%)
= 5,376,881
Where PVA(10y, 5.5%) is the present value interest factor for an annuity of $1 for 10years at 5.5%, and PV(10y, 5.5%) is the present value interest factor for $1 to be received in 10years when rates are 5.5%
Using the effective annual interest (EAI) rate method which is required under IFRS.

Year	Carrying Amount at Start of Year	Interest Expense @ EAI	Interest Payment @ Coupon Rate	Amortisation of Premium	Carrying Amount @ End of Year
2010	5,376,881	295,728	325,000	29,272	5,347,609
2011	5,347,609	294,119	325,000	30,881	5,316,728
Alternatively, take the PV of the cash flows over the remaining 8 years at 5.5%
5,000,000 x 6.5% x PVA(8y, 5.5%) + 5,000,000 x PV(8y, 5.5%) = 5,316,728

作者: cityboy 时间: 2013-9-23 15:13

15. Compared to classifying a lease as a financing lease, if a lessee reports the lease as an operating lease it will most likely result in a:
A. lower return on assets.
B. higher debt-to-equity ratio.
C. lower cash from operations.

Ans: C.
The cash from operations is lower if the lease is classified as an operating lease, because the full lease payment is shown as an operating cash outflow. If it were classified as a financing lease, only the portion of the lease payment relating to interest expense reduces the operating cash flow and the portion of the lease payment that reduces the lease liability is classified as a financing cash flow. Therefore, the lessee’s cash from operations tends to be lower under operating leases.

The following two figures summarize the difference between the effects of finance leases and operating leases on the financial statements and ratios of the lessee.
Figure 1: financial statement impact of lease accounting

	Finance	Operating
Assets	Higher	Lower
Liability (current and long-term)	Higher	Lower
Net income (in the early years)	Lower	Higher
Net income (later years)	Higher	Lower
Total net income	Same	Same
EBIT (operating income)	Higher	Lower
Cash flow from operations	Higher	Lower
Cash flow from financing	Lower	Higher
Total cash flow	Same	Same

Figure 2: ratio impact of lease accounting

	Finance	Operating
Current ratio (CA/CL)	Lower	Higher
Working capital (CA-CL)	Lower	Higher
Asset turnover (Revenue/TA)	Lower	Higher
Return on assets*(NI/TA)	Lower	Higher
Return on equity*(NI/SE)	Lower	Higher
Debt/ Asset	Higher	Lower
Debt/ Equity	Higher	lower

作者: cityboy 时间: 2013-9-23 15:13

16. A company issued $2,000,000 of bonds with a 20 year maturity at 96. Seven years later, the company called the bonds at 103 when the unamortized discount was $39,000. The company would most likely report a loss of:
A. $60,000.
B. $99,000.
C. $138,000.

Ans: B.

Redemption cost	$2,060,000	$2,000,000 x 103/100
Carrying amount retired	1,961,000	$2,000,000 – $39,000
Loss on redemption	$99,000

作者: cityboy 时间: 2013-9-23 15:13

17. A capital lease requires annual lease payments of $2,000 at the start of each year. Fair value of the leased equipment at inception of the lease is $10,000 and the implicit interest rate is 12 percent. If the present value of the lease payments equals the fair value of the equipment at the inception of the lease, the interest expense (in $) recorded by the lessee in the second year of the lease is closest to:
A. 960.
B. 1,104.
C. 1,200.

Ans: A.

Year	Starting Balance	Interest Expense @12%	Lease Payment	Principal Reduction	Ending Balance
1	10,000	0	2,000	2,000	8,000
2	8,000	960

作者: cityboy 时间: 2013-9-23 15:13

18. Which of the following is most likely a benefit of debt covenants for the borrower?
A. Reduction in the cost of borrowing.
B. Limitations on the company’s ability to pay dividends.
C. Restrictions on how the borrowed money may be invested.

Ans: A.
Debt covenants are restrictions imposed by the lender on the borrower to protect the lender’s position. Debt covenants can reduce default risk and thus reduce borrowing costs.

B is incorrect. This is a disadvantage of using debt covenants for the borrower.

C is incorrect. This is a disadvantage of using debt covenants for the borrower.

作者: cityboy 时间: 2013-9-23 15:13

19. An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases. Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for:
A. the debt-equity ratio but not the interest coverage ratio.
B. the interest coverage ratio but not the debt-equity ratio.
C. both the debt-equity ratio and the interest coverage ratio.

Ans: A.
The adjustments to convert operating leases into capital leases would increase the amount of total debt in the debt-equity ratio thus increasing the ratio; the portion of the lease payment estimated to be lease interest expense would lower the interest coverage ratio.

作者: cityboy 时间: 2013-9-23 15:14

20.A company issued a $50,000 7-year bond for $47,565. The bonds pay 9 percent per annum and the yield-to-maturity at issue was 10 percent. The company uses the effective interest rate method to amortize any discounts or premiums on bonds. After the first year, the yield to maturity on bonds equivalent in risk and maturity to these bonds is 9 percent. The amount of the bond discount amortization ($) recorded in the second year is closest to:
A. 282.
B. 348.
C. 2,178.

Ans: A.

	Interest paid = Market rate at issue x Issued amount of bonds = 9% x $50,000
	Interest expense = Market rate at issue x Carrying (BV) of bonds Amortization of discount = Interest expense - Interest paid
Year		Interest Paid	Interest Expense	Amortization of Discount	Carrying Value
0					47,565
1		4,500	4,757	257	47,822
2		4,500	4,782	282	48,104
Amortization in the 2nd year is 282

作者: cityboy 时间: 2013-9-23 15:14

21. On 1 January 2008 a company enters into a lease agreement to lease a piece of machinery as the lessor with the following terms:

Annual lease payment due 31 December	$50,000
Lease term	5 years
Estimated useful life of the machine	6 years
Estimated salvage value of the machine	$0
Carrying value (cost) of leased asset	$160,000
Implied interest rate on lease	8%
The firm is reasonably assured of the collection of the lease payments.

Which of the following best describes the classification of the lease on the company’s financial statements for 2008?
A. Operating lease.
B. Sales type lease.
C. Direct financing lease.

Ans: B.
Under U.S.GAAP, lessee must treat a lease as a capital (finance) lease if any of the following criteria are met:
Title to the leased asset is transferred to the lessee at the end of the lease period.
A bargain purchase option permits the lessee to purchase the leased asset for a price that is significantly lower than the fair market value of the asset at some future date.
The lease period is 75% or more of the asset’s economic life.
The present value of the lease payments is 90% or more of the fair value of the leased asset.
Under U.S.GAAP, if any one of the capital (finance) lease criteria for lessees is met, and the collectability of lease payments is reasonably certain, and the lessor has substantially completed performance, the lessor must treat the lease as a capital (finance) lease.
From the lessor’s perspective, a capital lease under U.S.GAAP is treated as tither a sales-type lease or a direct financing lease. If the present value of the lease payments exceeds the carrying value of the assets, the lease is treated as a sales-type lease. If the present value of the lease payments is equal to the carrying value, the lease is treated as a direct financing lease.
It is a sales type lease: the lease period covers more than 75% of its useful life (5/6=83.3%) and the asset is on its books at less than the present value of the lease payments ($199,635) (PMT = $50,000, N=5, i=8%). The firm must have acquired or manufactured the asset if it is recorded at less than the present value of the lease payments.

作者: cityboy 时间: 2013-9-23 15:14

22. At the beginning of the year, a lessee company enters into a new lease agreement that is correctly classified as a finance lease, with the following terms:

Annual lease payments due at the end of the year	$100,000
Lease term	5 years
Appropriate discount rate	12%
Depreciation method	straight-line basis
Estimated salvage value	$0

With respect to the effect of the lease on the company’s financial statements in the first year of the lease, which of the following is most accurate? The reduction in the company’s:
A. pretax income is $72,096.
B. cash flow from financing is $56,742.
C. cash flow from operations is $72,096.

Ans: B.
The present value of the lease is $360,477.62. (n = 5, I = 12%, PMT = $100,000) 12% of the original PV is $43,257.31 and represents the interest component of the payment in the first year. The difference between the annual payment and the interest is the amortization of the lease obligation included in cash flow from financing. $100,000 – 43,257.31 = $56,742.69.

A is incorrect. Depreciation is $360,477.62 / 5 or $72,095.52 so the total reduction in pretax income would be interest plus depreciation or $115,352.83 (=43,257.31+72,095.52).

C is incorrect. Cash flow from operations would be reduced by the amount of the interest only (43,257.31) because the depreciation would be added back to determine cash flow from operations.

作者: cityboy 时间: 2013-9-23 15:14

23. At the beginning of the year, a company issues a $1,000 face value, semiannual coupon, bond with an 8 percent coupon rate maturing in 10 years. The annual market rate of interest at issuance was 12 percent. The initial liability recorded for this bond is closest to:
A. $771.
B. $774.
C. $1,000.

Ans: A.
The liability recorded is based on market rates of interest when the bond is issued and not the coupon rate on the bond. The market value of the bond at issuance was $770.60. (FV=1,000, PMT=40, N=20, I=6.0).

作者: cityboy 时间: 2013-9-23 15:14

24. At the beginning of the year, two companies issued debt with the same market rate, maturity date, and total face value. One company issued coupon-bearing bonds at par and the other company issued zero-coupon bonds. All other factors being equal for
that year, compared with the company that issued par bonds, the company that issued zero-coupon debt will most likely report:
A. higher cash flow from operations but not higher interest expense.
B. both higher cash flow from operations and higher interest expense.
C. neither higher cash flow from operations nor higher interest expense.

Ans: A.
When a company issues a zero-coupon bond, cash flow from operations is overstated over the life of the bond. Interest expense is recorded for income statements purposes, but is added back in the statement of cash flows as a non-cash adjustment to cash flow from operations.

作者: cityboy 时间: 2013-9-23 15:14

25. A company is considering issuing either a straight coupon bond or a coupon bond with warrants attached. The proceeds from either issue would be the same. If the firm issues the bond with warrants attached instead of the straight coupon bond, which of the following ratios will most likely be lower for the bond with warrants?
A. Return on assets.
B. Debt to equity ratio
C. Interest coverage ratio.

Ans: B.
The portion of the proceeds attributable to the warrants would be classified as equity, thus the portion classified as a liability would be smaller (lower). Therefore the debt-to-equity ratio will be lower, for the bonds with warrants.

A is incorrect. Since interest expense would be lower for a bond with warrants attached, Net Income would be higher and ROA would be higher.

C is incorrect. EBIT would be the same regardless of financing method; the coupon on the bond with warrants attached would be lower if the two issues provided the same proceeds, so the interest coverage (=EBIT/ Interest expense) would be higher for a bond with warrants attached.

作者: cityboy 时间: 2013-9-23 15:15

26. On 1 January 2012 a company enters into a lease agreement to lease a piece of machinery as the lessor with the following terms:

Annual lease payment due 31 December	$75,000
Lease term	6 years
Estimated useful life of the machine	7 years
Estimated salvage value of the machine	$0
Carrying value (cost) of leased asset	$300,000
Implied interest rate on lease	7%
The firm is reasonably assured of the collection of the lease payments.

The total affect on 2012 pre-tax income for the lessor from this lease is closest to:
A. $32,143.
B. $75,000.
C. $82,519.

Ans: C.
This is a sales type lease: the lease period covers more than 75% of its useful life
(6/7=85.7%) and the asset is on its books at less than the present value of the lease payments ($357,490) (PMT = $75,000, N=6, i=7%). The firm must have acquired or manufactured the asset if it is recorded at less than the present value of the lease payments.
The income in the first year will therefore consist of the gross profit on the sale (357,490-300,000)=57,490 plus interest revenue from financing the lease = 25,024(see below)

Year	Start balance	interest	PMT	End balance
1	357,490	7%x357,490=25,024	75,000	357,490-(75,000-25,024) =307,514

Total income = 57,490 + 25,024 = 82,514

作者: cityboy 时间: 2013-9-23 15:15

27. A company had the following events related to $5 million of 10-year bonds with a coupon rate of 8% payable semi-annually on 30 June and 31 December:
Issued on 1 January 2005, when the market rate of interest was 6%.
Bought back in an open market transaction on 1 January 2011, when the market rate of interest rate was 8%.
Which of the following statements best describes the effect of the bond repurchase on the financial statements for 2011? If the company uses the indirect method of calculating the cash from operations, there will be a:
A. $346,511 gain on the income statement.
B. $743,873 gain on the income statement.
C. $350,984 decrease in the cash from operations.

Ans: C.
The book value of the bonds on 1 January 2011 is equal to the present value of the remaining coupon payments and principal discounted at the market rate at time of issue (3% per period).
Coupon = 0.08 x0.5x5,000,000=200,000; there are 4 years remaining or 8 coupon payments
Book value
= 200,000 PVAnnuity (n=8, i=3%)+5,000,000PV(n=8, i=3%)
=1,403,938+3,947,046
=5,350,984
Using a financial calculator: PMT = 200,000; FV=5,000,000; I=3%; N=8;
Compute PV = 5,350,984,
Because the market interest rate when the bonds are brought back (8%) is equal to the coupon rate, the company can buy back the bonds at par, $5,000,000
Cost of repurchase    $5,000,000
Book value                   5,350,984
Gain on retirement          350,984
On the cash flow statement the gain would be deducted from net income in calculating the cash from operations under the indirect method, and the cash paid to repurchase the bonds would be a cash outflow in the financing section.

作者: cityboy 时间: 2013-9-23 15:15

28. At the beginning of the year, a company issued a $1,000 face value bond. Interest on that bond is paid semiannually, the annual coupon rate on the bond is 9%, and the bond matures in ten years. The market rate of the interest at the time the bond was issued was 10% on an annual basis. The amount of the initial liability recorded for this bond was closest to:
A. $938.
B. $961.
C. 1,065.

Ans: A.
The liability and interest expense recorded are both based on market rates of interest when the bond was issued, not the coupon rate on the bond. The market value of the bond at issuance was $937.68. (FV=1000, PMT=45, N=20, i=5.0).

作者: cityboy 时间: 2013-9-23 15:15

29. Bond Features, Inc. (“BFI”) has bonds outstanding with a $900,00 par value. The BFI bonds pay a 4.5% coupon, mature in three years, and have net book value of $785,000. The bonds are convertible into 20,000 shares of common stock, with a $1 par value. The current market value of the common shares is $62.50. Under U.S.GAAP, the amount that will be recorded as additional paid-in capital if the bonds are immediately converted is closest to:
A. $115,000.
B. $765,000.
C. $1,250,000.

Ans: B.
Under U.S.GAAP, bond proceeds are reclassified from debt to equity when the bond is converted into common stock. The amount recorded in additional paid-in capital is the balance of the bond liability after crediting the outstanding bond discount and the common stock issued at par. No gain or loss is recorded from the conversion.
Bond discount = net book value – bond par value
= $785,000 - $900,000= $115,000
Common stock = # shares on conversion x par value
=20,000 x $1= $20,000
Additional paid-in capital
= bond par value – (bond discount + common stock)
= $900,000 – (115,000 +20,000)
=$765,000

作者: cityboy 时间: 2013-9-23 15:15

30. A company receiving leased equipment would prefer a finance lease to an operating lease when it:
A. wishes to show a higher cash flow from operations.
B. desires a lower debt-to-equity ratio.
C. has a low marginal tax rate.

Ans: A.
Under an operating lease, the entire lease payment is reported as operating cash outflow. A finance lease allocates the outflow between both operating ad financing cash outflows, with only the interest portion of the lease payment treated as an operating cash outflow.

B is incorrect. A company’s leverage ratios will be higher under a finance lease arrangement. The finance lease method creates a lease obligation liability. An operating lease is preferred if a firm wants to keep debt off of its balance sheet.

C is incorrect. Companies with higher marginal tax rates prefer finance leases, as expenses are higher in the early period of the lease. A low marginal tax rate does not result in a finance lease preference.

作者: cityboy 时间: 2013-9-23 15:15

31. Which of the following statement most accurately reflects the effective interest method of amortizing bond premium and discount?
A. using the effective interest method results in a different interest expense each period.
B. The coupon interest rate is the market interest rate at the time the debt was issued.
C. A bond sells at a premium when the market interest rate exceeds the coupon rate.

Ans: A.
The effective interest method requires multiplying the yield-to-maturity of the bond by the net book value. The net book value approaches par value as the bond nears maturity. Periodic interest expense increase (decreases) as the bond’s book value increase (decreases).

B is incorrect. The coupon interest rate for a bond may be higher or lower than the market interest rate at the date of issuance. Higher coupon rates than market rates indicate a premium to par value, and lower coupon rates than market rates indicate a discount from par value.

C is incorrect. A bond sells at a premium when the market interest rate is less than the coupon t\rate. If the market rate exceeds the coupon rate, the bond will sell at a discount.

作者: cityboy 时间: 2013-9-23 15:16

32. Madison Inc. is planning a bond issue. They are considering issuing either a straight coupon bond or a coupon bond with warrants attached. The proceeds from either issue would be the same. What will be the effect on their interest expense and balance sheet liability if they issue the bonds with warrants as compared to the straight bonds? For the bonds with warrants the:

	Interest expense will be	Balance sheet liability will be
A	Lower	Lower
B	Lower	Higher
C	Higher	Lower

Ans: A.
The portion of the proceeds attributable to the warrants would be classified as equity, thus the portion classified as a liability would be smaller (lower). The lower balance sheet value would lead to a lower interest expense when it is calculated. The interest expense is based on the liability at the beginning of the period, not the coupon payment.

作者: cityboy 时间: 2013-9-23 15:16

33. Compared to an operating lease, all other things being equal, over the term of a finance lease,
A. The interest coverage ratio will decrease.
B. The return on assets ratio will decrease.
C. The asset turnover ratio will increase.

Ans: C.
Lease capitalization will increase asset balances resulting in a lower asset turnover (net sales / average total assets). As the leased asset is depreciated and the asset balance becomes smaller, the ratio will increase. The lower the asset balance is (or becomes), the higher the asset turnover ratio will be.

A is incorrect. The interest coverage ratio increases over the lease term of a finance lease as the interest on the lease liability declines as the principal is paid down. On the other hand, the interest coverage ratio will be higher at all times with an operating lease as there is no interest.

B is incorrect. With a finance lease, the return on assets will increase as the earnings increase due to the lower interest expense on the lease liability and the declining asset base resulting from depreciation. Consequently, later in the lease term, higher earnings will be returns to lower asset levels and the asset turnover ratio will increase, not decrease.

作者: cityboy 时间: 2013-9-23 15:16

34. Bao Inc. issued its Class H series bonds at $10,400 on 1/1/x3. Class H bonds have a 10% coupon paid semi-annually and a face value of $10,000, maturing in two years. Using the effective interest method, calculate the amount of interest expense associated with the Class H bonds reported by Bao for the period ending 12/31/x3.
A. $405.
B. $808.
C. $1,000.

Ans: B.
The periodic payment is $500 or one-half of the 10% annual coupon. The yield-to-maturity is solved for, using a financial calculator, as 3.90% semi-annually (see below). At the end of the first reporting period (Year 1), the total interest expense is $807.52 (=$405.60 + 401.92).
Periodic coupon payment
= semi-annual payment x coupon rate x face value
=0.5 x 10.0% x $10,000
= $500
Semi-annual yield-to-maturity:
N=4; PV= -$10,400; PMT =$500; FV = $10,000
Compute 1/Y = 3.90 semi-annual effective interest rate

	(3.9 x NBV) Interest exp.	Coupon	Premium	NBV
Period 0			$400.00	$10,400.00
Period 1	$405.60	$500.00	305.60	10,305.60
Period 2	401.92	500.00	207.52	10,207.52
Period 3	398.09	500.00	105.61	10,105.61
Period 4	394.12	500.00	-0.27(~$0)	9,99.73 (~$10,000)

Interest expense
= NBV of bond at end of previous period x effect interest rate
NBV t= NBV t-1 + interest expense – coupon
Interest expense = 405.60 + 401.92 = 807.52

作者: cityboy 时间: 2013-9-23 15:16

35. A retail company that leases the majority of its space has total assets of $4,500 million and total long-term debt of $2,125 million bearing an average interest rate of 10%.
Note 8: Operating leases

Year	Millions
2011	$200
2012	200
2013	200
2014	200
2015	200
2016 and thereafter	1,260
total	$1,960

After adjustment for the off-balance-sheet financing, the debt-to-total-assets ratio for the company is closest to:
A. 58%.
B. 62%.
C. 72%.

Ans: A.
The present value of the operating leases should be added to both the total debt and the total assets. To estimate the present value it is appropriate to estimate the number of years of lease payments reflected in the 2016 and thereagter figure. Based on the constant expense shown in the first 5 years, there are 9 (1,260/140) more payment for total of 14 payments.
Adjusted debt to total assets
= (2,125+1,134)/(4,500+1,134)=57.8%

作者: cityboy 时间: 2013-9-23 15:16

36. Matrix pricing is a process in which a bond’s yield-to-maturity is determined from bonds currently available in the market that have similar attributes as the bond being considered.
Matrix pricing is most similar to the :
A. Debt-rating approach only.
B. Yield-to-maturity approach.
C. Yield-to-maturity approach and Debt-rating approach.

Ans: A.
Matrix pricing (as describe) is an example of the debt-rating approach only.

作者: cityboy 时间: 2013-9-23 15:16

37. The following information is available from a company’s 2012 financial statements:
Note 6: employee costs.

(all figures in $thousands)	2012	2011
Wages and salaries	$21,000	$18,500
Share-based payment costs (note 15)	600	425
Defined contribution pension plan	1,525	1,462
Retirement benefit obligations (note 17)	728	620
Other employee costs	3,233	3,080
Total employee costs	$27,086	$24,087

Note 17: retirement benefit obligations
Amounts recognized in the income statement for the year

(all figures in $thousands)	2012	2011
Current service cost	$692	$588
Interest cost on pension obligation	80	65
Expected return on plan assets	(50)	(45)
Past service costs recognized in the year	6	12
Total income statement charge	$720	$620

The pension expense (thousands) reported in 2012 is closest to:

A.
$1,525.

B.
$2,217.

C.
$2,253.

Ans: C.
The pension expense would be the sum of the expense for the defined contribution plan and the defined benefit plan (retirement benefit obligation):
1,525+728=2,253.

作者: cityboy 时间: 2013-9-23 15:17

38. Bao Capital issued bonds in 2006 that mature in 2016. The measurement basis used for the bonds on the 2008 balance sheet will be:
A. market value.
B. historical cost.
C. amortized cost.

Ans: C.
Bonds payable issued by a company are financial liabilities that are measured at amortized cost.

作者: cityboy 时间: 2013-9-23 15:17

39. If market interest rates have changed materially since a firm issued a bond, and the firm does not use the fair value reporting option, how is the change in the market value of the firm’s debt most likely to be reported in the firm’s financial statements?
A. The gain or loss in market value must be calculated and disclosed in the footnotes to the financial statements.
B. Net income and equity are unaffected, but the change is disclosed by the firm’s management.
C. Net income is unaffected, but the change in market value is recorded in other comprehensive income.

Ans: B.
Material changes in the firm’s cost of debt capital should be included in the Management Discussion and Analysis section of the financial statements. If the firm does not use fair value reporting of debt obligations, net income and shareholders’ equity are not affected by changes in the market value of the firm’s debt, and disclosing its gain or loss in market value is not required.

作者: cityboy 时间: 2013-9-23 15:17

40. A firm that reports its lease of a conveyer system as an operating lease must disclose:
A. only the annual lease payment.
B. minimum lease payments for each of the next five years and the sum of lease payments more than five years in the future.
C. minimum lease payments for each of the next ten years and the sum of lease payments more than ten years in the future.

Ans: B.
Whether a lease is an operating or finance (capital) lease, both U.S.GAAP and IFRS require disclosure of the minimum lease payments for each of the next five years and the sum of minimum lease payments more than five years in the future.

作者: cityboy 时间: 2013-9-23 15:17

41. A dealer of large earth movers that leases the machinery to its customers is most likely to treat the leases as:
A. operating leases, and account for inventory using LIFO.
B. sales-type leases, and account for inventory using specific identification.
C. direct financing leases, and account for inventory using weighted average cost.

Ans: B.
Lessors that are dealers or manufacturers of the leased assets typically recognize sales revenue at the inception of a lease and thus account for their leases as sales-type capital (finance) leases. Dealers of high-value items that can be distinguished one from another, such as large earth movers, typically use specific identification to account for inventory.

作者: cityboy 时间: 2013-9-23 15:17

42. Which of the following statements regarding the financial statement reporting of leases is most accurate?
A. Under an operating lease, the lease treats the entire lease payment as a cash outflow from operations.
B. The lessee’s current ratio is the same whether a lease is treated as an operating or finance lease.
C. At the inception of a direct financing lease, the lessor recognizes gross profit.

Ans: A.
With an operating lease, the entire lease payment is recorded as rent expense and classified as an operating cash outflow. A finance lease results in a lower current ratio than an operating lease because the current portion of the principal repayment component will be added to current liabilities. The lessor does not recognize any profit at the inception of a direct financing lease.

作者: cityboy 时间: 2013-9-23 15:17

43. In accounting for a defined benefit pension plan, the amount reported as “prior service cost” refers to the:
A. total value of benefits already paid to retirees who are still receiving pension payments.
B. present value of the pension benefits due to employees based on their employment up to the date of the statement.
C. present value of the increase in future pension benefits from a change in the terms of the pension plan.

Ans: C.
Prior service costs arise when changes in the terms of a defined benefit pension plan increase the future benefit due employees based on their prior employment with the company.