Chapter 14 Smartbook (Bonds and Long-Term Notes)

On January 1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30 year 1, the company should recognize a discount amortization of

$354 (95,842 * 0.07 * 6/12) - 3,000

On January 1, 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 market interest rate is 7%. The bond issues for $191,684. On June 30 year 1, the company should recognize a discount amortization of

$709 (191,684 * 0.07 * 6/12) - 6,000

Which of the following are correct regarding bonds?

1. They obligate the issuing company to repay the bonds at a specific date. 2. They obligate the issuing company to pay a specific amount.

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds?

1. To use a medium of exchange in mergers and acquisitions. 2. To sell the bonds at a higher price. 3. To enable smaller or debt-heavy companies to gain access to the bond market.

Which of the following are true regarding zero-coupon bonds?

1. Zero-coupon bonds issue at deep discounts. 2. Zero-coupon bonds do not pay interest.

Which of the following purchases frequently involve installment notes payable?

1. automobiles 2. land 3. buildings

Debt issue costs:

1. reduce the cash proceeds from the issuance of debt. 2. increase the effective interest rate of borrowing.

Installment notes typically involve the purchase of assets and

1. require installment payments over time. 2. periodic payments include principal and interest

Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is

1.32

On January 1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds of

200,00

On January 1, 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 market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds

$217,966

The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic

Periodic interest is incurred

Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue?

Peter should recognize 3 months of interest

On January 1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for?

Reduce the cash proceeds and increase the discount and debt issue costs account

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?

The method can only be used if it produces results that are not materially different from those produced by the effective interest method

Which of the following are true regarding bonds sold with detachable warrants?

The warrants can be exercised separately from the bonds. The warrants can be sold by the bondholder to another investor.

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds?

The warrants can be separated from the bonds.

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.

In a troubled debt restructuring with modified terms, if total cash payments are less than the book value of the debt,

the difference is recorded as a gain in net income.

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?

the difference represents the time value of money

Accounting for troubled debt restructuring with modified terms depends on whether under the new agreement,

total cash payments are more or less than the book value of the debt

If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the:

value of the asset or service exchanged

Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the

value of the purchased equipment.

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit

bonds payable for $2,500,000. premium on bonds payable for $75,000

The interest rate on notes payable typically is equal to the ______ rate

market

Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit

notes payable

Schulz Company borrows cash from a bank and signs a promissory note. The bank should record

notes receivable

Zero-coupon bonds typically issue at a deep discount because they

pay no interest

If bonds sell between interest periods, the amount received by the bond issuer includes the bonds selling price

plus accrued interest

The primary purpose of the call feature associated with bonds is to

protect the issuer against declining interest rates.

Jones Company wants to improve its debt equity ratio and offers holders of convertible bonds additional consideration for converting their bonds to common stock. During 20X1, the company paid $500,000 for such consideration. This amount should be

recognized as an expense when paid.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to

repay a certain amount after a specific date

On January 1, 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

200,00

Which of the following correctly describes a bond indenture?

A document detailing the promises made by the bond issuer

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

effective interest method

Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster

elected the fair value option

True or false: Holding gains resulting from decreases in the fair value of debt indicate that the company's debt has become less risky

false

Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ________ coupon bonds

zero

Burns Company issues bonds for their face amount of $2 million. Over the life of the bonds, the company pays a total of $3.2 million to bondholders. What can you deduce from these facts regarding the difference between the face amount and the bonds' cash flows?

The $1.2 million represents the time value of money

On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds

$115,589

Which of the following represent the typical characteristics of liabilities?

1. The requirement of future cash payments 2. Future cash payments are certain or estimable 3. Interest accrues as time passes on long-term liabilities

Which of the following are common strategies for debtors to retire bonds prior to the maturity date?

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

Which of the following statements regarding the fair value option is correct?

It can be applied on an "instrument-by-instrument" basis.

True or false: The interest rate stated in a note is typically equal to the market rate

True

Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the

debt to equity ratio

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

discount

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

premium

An early extinguishment of debt refers to long-term liability such as bonds that are

retired prior to maturity

Which of the following is correct regarding the effective interest method?

Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt

When an accounting period ends between interest dates, interest should be

accrued since the last interest date

Which of the following is a common factor that affects the fair value of a company's bonds?

changes in current market rates

Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as _______ bonds

convertible

Common methods used by bond issuers to induce bond holders to convert their bonds to common stock are

favorable conversion ratios additional cash stock warrants

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

indenture

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

mislead investors