Question

The purchase of treasury stock ________.

		requires recognition on the income statement of any gain made on the purchase
		always decreases net income
		does not require recognition on the income statement of any gain made on the purchase
		requires recognition on the income statement of any loss incurred on the purchase

Buzz Corporation issued $50,000 worth of 10-year, 8% bonds for $48,359.66. The 8% is the ________.

		stated rate
		market rate
		future rate
		face value

The risk associated with debt is risk to ________.

		financial analysts following a company
		the issuing company’s creditors
		positive financial leverage
		the borrowing company

Answer 1

1.

The purchase of treasury stock does not require recognition on the income statement of any gain made on the purchase.

Correct option is (c)

When treasury shares are bought, treasury stock is debited by the purchase price and cash is credited. It is shown in the balance sheet as a negative item in the stockholders' equity. Thus, no gain or loss on purchase of treasury stock is reported in the income statement.

2.

Buzz Corporation issued $50,000 worth of 10-year, 8% bonds for $48,359.66. The 8% is the stated rate.

Correct option is (a)

8% is the stated rate i.e. the rate promised by the issuing company at which the company will pay interest on the bonds.

3.

The risk associated with debt is risk to positive financial leverage.

Correct option is (c)

When debt is issued, interest burden on the company increases. Rate of return on the funds invested in the business must be more than rate of interest on the debt, otherwise it will lead to negative financial leverage.