Classifying liabilities as either current or long-term helps creditors assess:
A) The extent of a firm's liabilities.
B) The relative risk of a firm's liabilities.
C) The degree of a firm's liabilities.
D) The amount of a firm's liabilities.

Answer: C) The degree of a firm's liabilities.

Short term liabilities fall due within one year or one operating cycle from the balance sheet date.
Long term liabilities fall due beyond one year from the balance sheet date
Thereore, classification helps assess the degree of a firm' liabilities

2) Bond X and bond Y are both issued by the same company. Each of the bonds has a maturity value of $100,000 and they each pay interest at 8%. The current market rate of interest is 8%.  Bond X matures in 7 years while bond Y matures in 10 years. Which of the following is correct?
A) Both bonds will sell for almost the same amount.
B) Both bonds will sell for more than $100,000.
C) Bond X will sell for more than bond Y.
D) Bond Y will sell for more than bond X.

Answer: A) Both bonds will sell for almost the same amount.

Since the market interest rate is the same as the coupon rate =8% both bonds will sell for par i.e. $100,000
(see calculations below for confirmation)

To calculate the price of the bond we need to calculate / read from tables the values of
PVIF= Present Value Interest Factor
PVIFA= Present Value Interest Factor for an Annuity
Price of bond= PVIF * Redemption value + PVIFA * interest payment per period

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
PVIF( n, r%)= =1/(1+r%)^n

Price of bond X
Coupon rate= 8.000%
Face value= $100,000
Interest payment per year= $8,000.00 =8.% x 100000

Frequency= S Semi Annual

No of years to maturity= 7
No of Periods=n= 14 =2x7

Discount rate annually= 8.00% Semi Annual
Discount rate per period=r= 4.00% =8.%/2

Price of bond=PVIFA X Interest Payment per period +PVIF X Redemption value

Interest payment per period= $4,000 =8000/2
Redemption value= $100,000 =Face Value

PVIF (14 periods, 4.% rate)= 0.57747508
PVIFA (14 periods, 4.% rate)= 10.56312293

PVIFA X Interest Payment= $42,252.49 =10.56312293*4000
PVIF X Redemption value= $57,747.51 =0.57747508*100000
Total= $100,000 =Price of bond

Answer: Price of bond= $100,000

Price of bond Y
Coupon rate= 8.000%
Face value= $100,000
Interest payment per year= $8,000.00 =8.% x 100000

Frequency= S Semi Annual

No of years to maturity= 10
No of Periods=n= 20 =2x10

Discount rate annually= 8.00% Semi Annual
Discount rate per period=r= 4.00% =8.%/2

Price of bond=PVIFA X Interest Payment per period +PVIF X Redemption value

Interest payment per period= $4,000 =8000/2
Redemption value= $100,000 =Face Value

PVIF (20 periods, 4.% rate)= 0.45638695
PVIFA (20 periods, 4.% rate)= 13.59032634

PVIFA X Interest Payment= $54,361.31 =13.59032634*4000
PVIF X Redemption value= $45,638.70 =0.45638695*100000
Total= $100,000 =Price of bond

Answer: Price of bond= $100,000

3) Straight-line amortization of bond discount or premium:
A) Can be used for amortization of discount or premium in all cases and circumstances.
B) Provides the same amount of interest expense each period as does the effective interest method.
C) Is appropriate for deep discount bonds.
D) Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

Answer: D) Provides the same total amount of interest expense over the life of the bond issue as does the effective interest method.

Total interest expense= Total cash payments until maturity ( periodic interest + principal at maturity) - Total cash received at the issue date

Whichever method is used ( straight line or effective interest rate for amortization ) ; it does not affect any term in the above equation

4) When the interest payment dates are March 1 and September 1, and the notes are issued on July 1, the amount of interest expense to be accrued at December 31 of the year of issue would:
A) Not be required.
B) Be for six months.
C) Be for four months.
D) Be for ten months.

Answer: C) Be for four months.

Months elapsed from 1st September to 31 December= 4 months
The accrued interest is the interest calculated on a pro rata basis , i.e. in this case 4 months

5) How would the carrying value of bonds payable be affected by the amortization of each of the following?
Premium Discount
A) No effect No effect
B) No effect Increase
C) Increase Decrease
D) Decrease Increase

Answer: D) Decrease Increase

The carrying value of the bonds payable =
Face value - Unamortized discount in the case of discount bonds
As the discount is amortized the carrying value gradually increases as the maturity date approaches in the case of discount bond

The carrying value of the bonds payable =
Face value + Unamortized premium in the case of premium bonds
As the premium is amortized the carrying value gradually decreases as the maturity date approaches in the case of premium bond

6) When a long-term note is given in exchange for equipment, the amount considered as paid for the machine is:
A) The invoice price.
B) The wholesale price.
C) The present value of cash outflows discounted at the stated rate.
D) The present value of the note payments discounted at the market rate.

Answer: D) The present value of the note payments discounted at the market rate.

If the long term note was sold in the market to the investors it would have sold at a price equal to the present value of the note payments discounted at the market rate. Since the note is given in exchange for the equipment, this should be the amount considered as paid for the machine.

On the liabilities side we have notes payable stated at an amount equal to the the present value of the note payments discounted at the market rate. On the assets side we have the equipment which is stated at an amount equal to this amount.