ACG2021 Ch9

Return on assets is calculated as net income divided by

average total assets

The formula for return on equity is

net income divided by average total shareholders' equity

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

retired bonds

bonds that systematically mature over a series of years are called

serial bonds

The ___ rate of interest is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense

stated

On January 1, ABC inc. issued $100,000 of 10%, 5-year bonds for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater, the debit to interest expense or the credit to cash?

the debit to interest expense will be greater because the market rate is greater than the stated interest rate

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity

debentures

unsecured bonds

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased

A __ bond is backed by a lien on specified real estate owned by the issuer

mortgage

serial bonds

bonds that mature in installments

A bond that sells for less than its face amount is sold at a

discount

callable bonds

the issuing company can pay off the bonds at any time

A company's capital structure refers to

the mixture of debt and equity used to finance the company

What correctly describes a bond indenture?

a document detailing the promises made by the bond issuer

Periodic payments on installment notes typically include

a portion that reflects interest at the effective interest rate a portion that reduces the outstanding loan balance

The two types of financing are

equity and debt financing

Rights and risk of ownership are retained by the lessor

operating

What are some possible benefits of leasing an asset rather than purchasing an asset?

improvement in cash flows tax savings lower periodic payments on the asset

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

interest expense

The ___ rate of interest is the interest rate on the date the bonds are issued

market

The early retirement of a bond includes

payment of cash recording of a gain or loss elimination of the liability

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

convertible

A formal debt instrument that obligates the borrower to repay a stated amount at a specified maturity date is referred to as

bond

convertible bonds

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

Which of the following are methods of long-term financing with debt?

bonds, leases, and notes payable

Gilmore issued $100,000 face value 6% bonds for $95,000. The journal entry to record the issuance of the bonds would include which of the following entries?

credit bonds payable $95,000 debit cash $95,000

Rights and risk of ownership are transferred to the lessee

capital

The journal entry to record the issuing of 100 bonds at their $1000 face value will include a debit to ___ and a credit to ___

cash; bonds payable

On January 2015, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30th and December 31st. The bonds mature in 5 years. The bonds were issued at face amount. On the date of issue, Meister should recognize a liability of

$200,000

term

bond issue that matures on a single date

If ABC company issues 100 of its $1000 bond at a price of 110, the journal entry using the net method will include which of the following entries?

A credit to bonds payable of $110,000 A debit to cash of $110,000

Callable bonds can be redeemed at the choice of the

bond issuer

Financing with ___ requires borrowing, whereas financing with ___ requires issuing shares of stock

debt; equity

Muchen Company sold bonds at a premium. Over the life of the bonds, the carrying value of the bonds will

decrease

The rate of interest printed on the face of a bond is referred to as ___ interest rate

face

The specific promises made to bondholders are described in a document called a bond

indenture

An advantage to financing with debt is that

interest is tax deductible

debt is considered a lower cost method of financing than equity because

interest on debt is tax deductible

What is true regarding a debenture bond?

it is secured (only) by the faith and credit standing of the issuer

A ___ is a contractual arrangement in which an owner provides a user the right to use an asset for a specific period of time

lease

A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as financial

leverage

The ___ rate of interest on a bond is the interest rate printed on the bond, whereas the ___ rate of interest is the current rate of interest being paid on investments with similar characteristics

stated; market