Question

1/ The distinction between senior and subordinated debt is associated with

general debenture bonds.

mortgage bonds.

collateral trust bonds.

commercial bonds.

2/ DRM Corporation leased a piece of machinery on January 1, 2020. At the date of signing the asset and lease obligation were recorded for $42,000. The first lease payment of $6,000 was due December 31, 2020 and the interest rate they used in their calculations was 7%. The lease term was 10 years. Which of the following best describes what would be reported on DRM’s Statement of Income for the year ending December 31, 2020?

$6,000 Lease Expense

$6,000 Lease Expense, $4,200 Depreciation Expense

$2,940 Interest Expense, $1,260 Depreciation Expense

$2,940 Interest Expense, $4,200 Depreciation Expense

3/ A debt to equity ratio of 50% indicates that

half of the company’s assets are financed through equity.

50% of the company’s interest expense comes from long-term debt financing.

the company is close to bankruptcy.

the company spends 50% of its operating earnings on interest.

Answer 1

Ans 1) Collateral Trust Bond

A collateral trust bond has some characteristic of subordinate bonds which is secured by pool of financial assets like stocks and bonds and managed by trusts. Collateral trust bond can't be associated with senior bonds so the answer is Collateral Trust Bond.

Ans 2) $2,940 Interest Expense, $4,200 Depreciation Expense

As assets is on lease but technically there is no different from any other fixed asset the way we are using it so there should be depreciation like any other assets.And $6,000 have total expense but all 6000 won't go in income statement only interest part will be going to Income statement remaining will be adjusted in balance sheet. 42000*0.07 = 2940

Ans 3) Half of the company’s assets are financed through equity.

50% debt to equity means remaining 50% is financed by equity.

Thanks