Ch 9- act 210

In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:

Equity

True or false: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.

False Reason: Market interest rates for bonds vary among companies based on their default risk.

Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:

a discount

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

greater than the stated rate.

The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.

higher

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

less than

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

notes payable for $1,120. interest expense for $4,000.

Which of the following are common characteristics or provisions of bonds?

secured or unsecured callable convertible

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long-term debt

Which of the following are common characteristics or provisions of bonds?

term or serial convertible secured or unsecured

A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)

bond. Reason: Common stock is not debt; common stock is equity.

The bond amortization schedule of Kroken Company shows that cash paid for interest exceeds interest expense. From this information we can infer that the bonds were issued at:

a premium

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at

a premium.

A corporation will issue bonds when

the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan.

Most corporate bonds pay interest

semiannually.

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

Hainzel Company issues $200,000 face amount, 6% semiannual bonds that are due in 7 years. If the market interest rate is 5%, the bonds will achieve an issue price of: (round to the nearest whole dollar)

$211,692 Reason: ($200,000 x 0.70773)+ ($6,000 x 11.69091)

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a premium. At end of the current fiscal period, the balance of premium on bonds payable is $1,200.The balance sheet presentation of Cabot's bonds should include:

Plus premium on bonds payable of $1,200 Bonds payable of $100,000

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:

long-term liabilities

On January 1, year 1, Ziegler issued 5-year bonds with a stated rate of 8% and a face amount of $100,000. The bonds pay interest semiannually. The market rate of interest was 10%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$92,278 Reason: (7.72173 x $8,000 x 0.5) + (0.61391 x $100,000) = $92,278

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000 Reason: $4,000 + $9,000

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:

$195,500

On January 2, 2018, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. 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.

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a premium. At the end of the current fiscal period, the balance of premium on bonds payable is $4,500. The liability reported on Omar's balance sheet should be:

$204,500

If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?

A debit to Cash of $110,000. A credit to Premium on Bonds Payable of $10,000 A credit to Bonds payable of $100,000

financing refers to borrowing money from creditors.

Blank 1: Debt or Liability

You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0

Company D

The journal entry to recognize the signing of an installment notes payable includes:

Credit Notes Payable Debit Cash

Candy Corporation has $100,000 of 8% bonds that were issued in Year 1 at face amount. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?

Credit cash $100,000 Debit bonds payable $100,000

What information does the times interest earned ratio provide to investors or creditors?

It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.

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

Times interest earned ratio Debt to equity ratio

Which of the following are the most common types of bonds?

Unsecured

Most bonds issued today are ______.

unsecured

financing refers to obtaining investment from stockholders. (Enter only one word.)

Blank 1: Equity, Shareholder, Stockholder, or equity

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$88,699 Reason: (5.65022 x $10,000) + (0.32197 x $100,000) = $88,699

On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following?

Credit cash $4,000 Debit to interest expense $3,211 Debit premium on bonds payable $789 Reason: Semi-annual interest rate = 6%/2 = 3% x $107,020.

Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:

debit to Cash credit to Premium on Bonds Payable credit to Bonds Payable

Wichtel Company issues $100,000 face amount, 10% semiannual bonds that are due in 7 years. The market interest rate is 8%. To calculate the issue price of the bonds, Wichtel should use an interest rate of ___% and ___ # of interest periods.

4; 14 Reason: 8%/2 = 4%; 7 years x 2 (semiannual) = 14

bonds require payment of the full principle amount of the bond at the end of the loan term.

Blank 1: Term

Market rates of bonds vary depending on the risk of the company issuing the bonds.

Blank 1: default

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

Blank 1: financial

Corporate bonds most often pay interest .

Blank 1: semiannually, semiannual, semi-annually, or biannually

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Credit discount on bonds payable $705 Credit cash $5,000 Debit interest expense $5,705 Reason: Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705

Munchin Corporation has $200,000 of 6% bonds that were issued in Year 1 at $202,000. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?

Debit bonds payable $200,000 Credit cash $200,000

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

Debt

True or false: A gain or loss is typically recognized upon retirement of bonds at or prior to maturity.

False Reason: At maturity, the carrying value of bonds is equal to maturity value, so no gain or loss occurs. The amount paid in an early extinguishment typically differs from the carrying value, resulting in a gain or loss.

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a discount. At end of the current fiscal period, unamortized bond discount is $1,200.The balance sheet presentation of Cabot's bonds should include:

Less discount on bonds payable of $1,200 Bonds payable of $100,000

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

bonds Reason: A note payable is not used to borrow from the general public.

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:

credit to Notes Payable for $24,000

Neumann Corporation is planning to issues bonds with a face amount of $2 million. If Neumann's accountant, Betty, wants to calculate the expected issue she should calculate the ____ of the related future cash payments using the ____ interest rate.

present value; market

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:

$8,600 Reason: $10,000 - $(2,000 - (10,000 x .06) = $8,600

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Credit cash $5,000 Reason: $100,000 x 10% x 6/12

The debt to equity ratios for three otherwise comparable companies are as follows: Adams: 1.5; Flagler: 1.8; Roberts: 1.4. The risk of bankruptcy appears to be lowest for:

Roberts

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880. Reason: $50,000 - (5,120 - 4,000 interest)

When is it more economical for a company to borrow funds by issuing bonds?

When the interest savings exceed the additional bond issuance costs.

The bond amortization schedule of Crocus Company shows that the carrying value of the bonds increased each interest period. From this information we can infer that the bonds issued at:

a discount

A high times interest earned ratio indicates the company

can meet its interest obligations as they become due.