Each payment on a mortgage note payable consists of: a. interest on the original balance of the loan. b. reduction of loan principal only. c. interest on the original balance of the loan and reduction of loan principal. d. interest on the unpaid balance of the loan and reduction of loan principal. 2. The process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset is called as a. Depletion b. Amortization c. Depreciation d. Appreciation 3. Upon formation of a partnership, each partner’s initial investment of assets should be recorded at their: a. book values. b. cost. c. market values. d. appraised values. 4. Bonds sell at a premium when the a. issuing company has a better reputation than other companies in the same business. b. market rate of interest is less than the stated interest rate at the time of issue. c. yield rate of interest is more than the stated rate at the time of issue. d. issuing company agrees to repay the maturity before the due date. 5. Free cash flow provides an indication of a company’s ability to: a. generate net income. b. generate cash to pay dividends. c. generate cash to pay account payable. d. generate cash to pay utilities bills.
The Correct Answer and Explanation is:
Here are the answers to the questions, along with explanations:
- Answer: d. interest on the unpaid balance of the loan and reduction of loan principal.
- Explanation: Mortgage payments typically consist of two parts: interest on the outstanding balance of the loan and a reduction in the loan principal. The interest is calculated based on the current (unpaid) balance, which decreases over time as the principal is paid down. The payment allocation typically varies, with more going toward interest in the early years of the mortgage and more going toward principal reduction in later years.
- Answer: c. Depreciation.
- Explanation: The process of allocating the cost of tangible assets (like buildings, machinery, etc.) over their useful life is known as depreciation. Depreciation is used for physical assets, whereas amortization applies to intangible assets (like patents or copyrights). Depletion refers to allocating the cost of natural resources (like oil or minerals), and appreciation refers to an increase in the value of an asset, not its allocation to expense.
- Answer: c. market values.
- Explanation: When a partnership is formed, each partner’s initial investment of assets should be recorded at market value (fair market value) at the time of contribution, not at book value or cost. This ensures that the value reflected in the partnership’s financial records represents the current worth of the assets being contributed.
- Answer: b. market rate of interest is less than the stated interest rate at the time of issue.
- Explanation: Bonds sell at a premium when the market interest rate is lower than the stated interest rate on the bond. Investors are willing to pay more than the face value of the bond because they can earn a higher interest rate than what is available elsewhere in the market. Conversely, if the market rate is higher, the bond will sell at a discount.
- Answer: b. generate cash to pay dividends.
- Explanation: Free cash flow (FCF) represents the cash that a company generates after spending on capital expenditures (like purchasing equipment or building infrastructure). It is an important indicator of a company’s ability to pay dividends to its shareholders, as well as to invest in its business or reduce debt. FCF focuses on cash that is available after necessary investments in the business.
Each of these concepts plays a crucial role in understanding financial operations and reporting, especially in corporate finance, accounting, and investment analysis.
