Question

MULTIPLE CHOICE QUESTIONS 1. The legal contract between the issuing corporation and the bondholders is called the bond indenture A) True B) False 2.One of the similarities of bond and equity financing is that both dividends and equity distribution payments are tax deductible. C) True D) False 3. Interest on bonds is tax deductible. E) True >F) False 2. The relationship between the market rate of a bond and the rate of return on the borrowed funds affects the company's return on equity. A) True B) False 3. A disadvantage of bond financing over equity financing is the burden on the cash flows of the company. A) True B) False 4. Term bonds are scheduled for maturity on one specified date, whereas serial bonds mature at more than one date. A) True B) False 6. On January 1, a company issued and sold a $400,000,7%, 10-year bond pavable, and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is: A) Debit Bond Interest Expense S14,000; credit Cash $14.000. B) Debit Bond Interest Expense S14.200: credit Cash $14.000; credit Discount on

Answer 1

1) Solution: True

Explanation: Bond indenture refers to a legal contract among the issuing corporation and the bondholders

　

2) Solution: False

Explanation: The bonds make payments on interest than dividend payments, and payments on interest are tax deductible whereas payments on dividend are not tax deductible for firms

　

3) Solution: True

Explanation: The payments on interest are tax deductible whereas payments on dividend are not tax deductible for firms

　

4) Solution: True

Explanation: The return on equity is dependent on the relationship among the rate of interest paid on borrowed funds and the borrowed funds from the investment

　

5) Solution: True

Explanation: The bond financing demerit over equity financing is the burden on the cash flows for an organisation

　

6) Solution: True

Explanation: The term bonds maturity is are scheduled on one specified date while in serial bonds there can be more than one