Accounting 2331 Chapter 9 Pre-Chapter Reading Assignment

The journal entry to recognize the signing of an installment notes payable includes: (Check all that apply)

*Credit Notes Payable *Debit Cash

Premium - Investors will pay more than face value

6% stated interest rate and 4% market interest rate

Investors will pay face value

6% stated interest rate and 6% market interest rate

Discount - Investors will pay less than face value

6% stated interest rate and 8% market interest rate

Unsecured bonds

Debentures

_____________ financing refers to borrowing money from creditors.

Debt

____________ financing refers to obtaining investment from stockholders.

Equity

Carrying value increases over time and is equal to face amount at maturity

Issued at a discount

Carrying value decreases over time and is equal to face amount at maturity

Issued at a premium

Carrying value does not change and is equal to issue price

Issued at face amount

What is the formula to compute the return on assets?

Net income divided by average total assets.

______________ bonds are supported by a specific asset the issuer pledges as collateral.

Secured

Bonds that mature in installments

Serial bonds

Promissory notes requiring periodic payments of interest and principle are referred to as ___________ notes.

installment

The times interest earned formula is calculated as earnings before interest and taxes divided by ____________________ ___________________.

interest expense

A(n) _________________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

lease

A bond will be issued at a premium when the market rate of interest is ________________ the stated rate.

less than

When a corporation repurchases its bonds from the bondholders, the bonds are called _____________ bonds.

retired

Corporate bonds most often pay interest _________________.

semiannually

The ____________ rate of interest is used to compute the cash interest paid to bondholders.

stated

Identify two ratios commonly used to assess a company's financial risk.

*Times interest earned ratio *Debt to equity ratio

Which of the following statements is correct?

Bonds may sell below, above, or at their face amount.

__________________ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

Primarily beneficial for lender (bond issuer)

Callable

The issuing company can pay off the bonds at any time

Callable bonds

Bond issue that matures on a single date

Term

A corporation that wishes to borrow from the general public rather than a bank will issue _______________

bonds.

The Discount on Bonds Payable account is classified as a(n)

contra-liability

Financing with ________________ requires borrowing, whereas financing with _________________ requires issuing shares of stock.

debt equity

An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the ____________ date.

due

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of _______________ risk.

financial

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate.

Beneficial for both, the borrower (bond issuer) and lender (bond investor)

Convertible

_____________ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

Bonds that can be exchanged for shares of stock in the issuing company

Convertible bonds

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:

default risk

The return on assets measures the amount of ______________ generated for each dollar of assets.

income

the ____________ rate of interest is the interest rate on the date the bonds are issued.

market

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as

term bonds

A company's capital structure refers to

the mixture of debt and equity used to finance the company.

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

Which of the following information is necessary to calculate the issue price of bonds? (Check all that apply)

*number of periods to maturity *face amount of bonds *interest payment each period

If a bond issues at "101", it means that it sells at

101% of its face amount