Chapter 14 LearnSmart - Bonds and Long-Term Notes

The times interest earned ratio is calculated by dividing _______ ______ plus _____ plus _____ by interest

net income; interest; taxes

The most common type of corporate debt is (a) common stock (b) notes payable (c) bonds

(c) bonds

At the end of 2015, Gwendolyn Company has a $100,000 long-term note outstanding. At the end of its 2016 fiscal period, a payment of $12,000 is due. The company's effective interest rate is 7%. Gwendolyn's balance sheet on December 31, 2015 should show a long-term liability of (a) $112,000 (b) $100,000 (c) $95,000

(c) $95,000 $100,000 less $5,000 current portion (12,000-$7,000 interest)

Bonds that systematically mature over a succession of years are referred to as (a) graded bonds (b) callable bonds (c) serial bonds (d) step bonds

(c) serial bonds

Jennifer, an Intermediate Accounting student, wants to determine whether a particular bond issue will sell at face amount, a premium, or discount without calculating the actual issue price. Jennifer should compare the ________ and the _________. (a) expected return; estimated return (b) face amount; estimated sales price (c) stated interest rate; market interest rate

(c) stated interest rate; market interest rate

On January 2, 2016 Walter Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years and sell for 95,842. On June 30, 2016 the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will (a) decrease by $354 (b) not change (c) increase by $354

(c) increase by $354

On December 31, Leann Corp. pays $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 (a) installment notes for $5,120 (b) interest expense for $5,120 (c) installment notes for $1,120 (d) interest expense for $4,000

(c) installment notes for $1,120 (d) interest expense for $4,000

Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as _____ bonds. (a) real estate (b) debenture (c) mortgage (d) indenture

(c) mortgage

Consistent with IFRS, on the date bonds are issued, bond issue costs are recognized by (a) expensing the total amount of the bond issue cost. (b) recognizing an asset that will be amortized over the life of the bonds. (c) reducing the amount of the recorded amount of the debt.

(c) reducing the amount of the recorded amount of the debt.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to (a) reacquire the bonds when interest rates rise. (b) reacquire the bonds when interest rates fall. (c) repay a certain amount at a specific date. (d) repay a certain amount at a date to be determined in the future. (e) pay interest if the company is profitable.

(c) repay a certain amount at a specific date.

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

indenture

Retiring any type of debt prior to its scheduled maturity date is referred to as ___________ _________ of debt.

early extinguishment

Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the _________ _______ method.

effective interest

Cash flows associated with corporate bonds typically consist of periodic interest payments and the ________ amount.

face

Periodic payments on installment notes include __________ and __________.

principal; interest

A company that recognizes a long-term notes payable has signed the legal document referred to as a ____________ note.

promissory

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on excellent reputation and performance of the company, its products, and its executives. Katie most likely is issuing a(n) ________ bond.

unsecured

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

Convertible

On January 1, 2016 Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds payable of (a) $200,000 (b) $260,000 (c) $212,000

(a) $200,000

During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was: (a) $400 (b) $9,000 (c) $9,400 (d) $0

(a) $400

Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries is correct? (a) Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000. (b) Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000. (c) Debit investment in bonds for $80,000; credit cash for $80,000.

(a) Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.

Which of the following represent the typical characteristics of liabilities? (a) Interest accrues as time passes. (b) Future cash payments cannot be measured. (c) Future cash payments are certain or estimable. (d) The requirements of future cash payments.

(a) Interest accrues as time passes. (c) Future cash payments are certain or estimable. (d) The requirements of future cash payments.

Peter Company issues 10-year bonds on October 1, 2015. The bond bays 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is true regarding interest recognized in its 12/31/15 income statement relating to this bond issue? (a) Peter should recognize 3 months of interest. (b) Peter should not recognize any interest Until April 1, 2016. (c) Peter should recognize 6 months of interest.

(a) Peter should recognize 3 months of interest.

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (a) Purchasing bonds on an open market. (b) Including a call feature when the bonds are issued. (c) Factoring bonds through a licensed factor.

(a) Purchasing bonds on an open market. (b) Including a call feature when the bonds are issued.

Which of the following are true regarding zero-coupon bonds? (a) Zero-coupon bonds issue at deep discounts. (b) Zero-coupon bonds do not pay interest. (c) Zero-coupon bonds are interest free.

(a) Zero-coupon bonds issue at deep discounts. (b) Zero-coupon bonds do not pay interest.

Which of the following are terms that can be used to refer to the periodic interest rate paid by bond issuers? (a) coupon rate (b) nominal rate (c) market rate (d) stated rate (e) effective rate

(a) coupon rate (b) nominal rate (d) stated rate

Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue? (a) creditworthiness of the issuer (b) reputation of the trustee who holds the indenture (c) frequency of scheduled interest payments

(a) creditworthiness of the issuer

Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster (a) elected the fair value option (b) classified the bonds as held to maturity (c) issued discounted bonds (d) issued premium bonds

(a) elected the fair value option

A common reason for redeeming a bond prior to its maturity date is that (a) market interest rates decreased. (b) the market price of bonds decreased.

(a) market interest rates decreased.

On January 2, 2015, Hauser Company issues $2 million face amount 10-year bonds. Issue costs associated with these bonds are $100,000. How much expense relating to the issue cost should Hauser recognize during the first year relating to these bonds? (a) $0 (b) $10,000 (c) $100,000

(b) $10,000

Which of the following statements is correct? (a) Bonds always sell for their face amount. (b) Bonds may sell below, above or at their face amount. (c) Bonds sell for their face amount if they are issued near the original interest date.

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

Adam's Corporation's balance sheet reports $100 million in bonds payable. Felix Company who purchased some of Adams' bonds will report the bonds as (a) a prepaid asset. (b) an investment. (c) a receivable. (d) equity.

(b) an investment.

The present value of a long-term liability is determined by discounting the related __________ by the _________ interest rate at issuance. (a) face amount; stated (b) cash flows; effective (c) face amount; effective (d) cash flows; stated

(b) cash flows; effective

A debit balance in the fair value adjustment account results in a _________ in the book value of the bonds. (a) increase (b) decrease

(b) decrease

Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the interest period by the (a) stated interest rate (b) effective interest rate (c) coupon rate (d) current rate of return

(b) effective interest rate

A bond investor who applies the effective interest method calculates interest revenue based on the _________ balance of the bonds time the _________ interest rate. (a) outstanding; stated (b) outstanding; effective (c) maturity; effective (d) effective; stated

(b) outstanding; effective

Bond holders who are not entitled to receive any liquidation payments until claims of other specific debt issues are satisfied must have purchased indentures that are referred to as (a) unsecured (b) subordinate (c) liquidating (d) secondary

(b) subordinate

When we multiply the face amount of the bonds with the stated interest rate, we calculate (a) intererst expense or revenue (b) the amount of interest paid

(b) the amount of interest paid

The issue price of bonds is calculated as the ________ value of all the cash flows required of the bonds.

present

A _______ balance in the fair value adjustment account increases the book value of bonds.

credit

On January 2, 2016 Walter Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables, calculate the issue price of the bonds. (a) $200,000 (b) $167,200 (c) $191,684

(c) $191,684 (200,000*.70892) + (6,000*8.31661)

On April 1, 2016, Norman Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The indenture is dated January 1, 2016, and the bonds mature 5 years from that date. On the date of issue, the price of the bonds will be equal to (a) $200,000 (b) $206,000 (c) $203,000

(c) $203,000

Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? (a) A bank must guarantee a new bond issue. (b) Bond issuers are not permitted to enter into separate agreement with bondholders. (c) It is impractical for the issuer to enter into an agreement with each bondholder.

(c) It is impractical for the issuer to enter into an agreement with each bondholder.

What is the primary reason why the issue price of a bond differs from the cash flows associated with the bond subsequent to its issuance. (a) The difference represents a discount. (b) The difference represents a premium. (c) The difference represents the time value of money.

(c) The difference represents the time value of money.

A new bond issue that offers 8% interest, while bonds of similar risk return 10%, will sell at: (a) face amount (b) a premium (c) a discount

(c) a discount

If a bond issues for 99, this means that the company issued the bond at (a) face amount. (b) a premium. (c) a discount.

(c) a discount.

Under the effective interest method, interest expense changes each interest period because of the: (a) effective rate changes (b) stated rate changes (c) face amount of the bonds change (d) carrying balance of the bonds change

(d) carrying balance of the bonds change

A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n) (a) indenture bond (b) secured bond (c) serial bond (d) debenture bond

(d) debenture bond

The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to (a) reduce reporting costs. (b) be easier to apply. (c) improve net income. (d) mislead investors.

(d) mislead investors.

Generally, liabilities are valued at their (a) net realizable value. (b) nominal amount. (c) fair market value. (d) present value.

(d) present value.