MGMT 200 Exam 3 170 QUESTIONS WITH

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MGMT 200 Exam 3| 170 QUESTIONS (WITH ANSWERS)| Purdue University

Question 1: mixture of liabilities and stockholders' equity a

business uses

CORRECT ANSWER : capital structure

Question 2: arranging funding by borrowing money

CORRECT ANSWER: debt financing

Question 3: obtaining investment from stockholders

CORRECT ANSWER : equity financing

Question 4: Cost of Financing

-Debt: interest expense (tax-deductible)

-Equity: dividends (not tax-deductible)

CORRECT ANSWER : Debt: interest expense (tax-deductible)

Equity: dividends (not tax-deductible)

Question 5: Examples of debt

CORRECT ANSWER : notes, leases, and bonds

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Question 6: Companies obtain external funds through

CORRECT ANSWER : debt financing (liabilities) and equity

financing (stockholders' equity)

Question 7: advantage of debt financing

CORRECT ANSWER : interest on borrowed funds is tax-

deductible

Question 8: Most car loans and home loans call for payment in

monthly installments rather than by a single amount at maturity

Each installment payment includes both:

• interest on borrowed amount
• reduction of outstanding loan balance

CORRECT ANSWER : installment notes

Question 9: establishment of note payable

CORRECT ANSWER : Debit: Cash

Credit: Notes Payable

Question 10: interest expense formula

CORRECT ANSWER : carrying value x % x (__/12)

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Question 11: decrease in carrying value

CORRECT ANSWER : cash paid - interest expense

Question 12: Pay monthly installment on note

Debit:

Interest Expense Notes Payable

Credit: Cash (should be same for each)

CORRECT ANSWER : Debit: Interest Expense

Debit: Notes Payable

Credit: Cash

Question 13: most notes payable require

CORRECT ANSWER: periodic installment payments

Question 14: a contractual arrangement by which the lessor

(owner) provides the lessee (user) the right to use an asset for a specified period of time

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-recorded by the lessee as a debit to lease asset and a credit to lease payable for the present value of the lease payments and at the beginning of the lease term

CORRECT ANSWER : lease

Question 15: Why do companies lease rather than buy?

• leasing reduces the upfront cash needed to use an asset
• lease payments often are lower than installment payments
• leasing offers flexibility and lower costs when disposing of an

asset

• leasing may offer protection against the risk of declining asset

values

CORRECT ANSWER : 1, 2, 3, and 4

Question 16: recording lease payable at the beginning of the

lease

Debit: Lease Asset

Credit: Lease Payable

CORRECT ANSWER : Debit: Lease Asset

Credit: Lease Payable