Chapter 9 Financial Accounting

Bonds issued at a premium are:

Issued above face value.

Lincoln County retires a $50 million bond issue when the carrying value of the bonds is $48 million, but the market value of the bonds is $54 million. Lincoln County will record the retirement as

A debit of $6 million to Loss due to early extinguishment.

When bonds are issued at a premium, what happens to the carrying value and interest expense each period over the life of the bonds?

Carrying value and interest expense decrease.

If bonds are issued at a discount, over the life of the bonds, the carrying value will:

If bonds are issued at a discount, over the life of the bonds, the carrying value will:

If bonds are issued at a discount, over the life of the bonds, interest expense will:

Increase.

Which of the following is not a primary source of corporate debt financing?

Receivables.

Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is less common?

Secured and serial.

In each succeeding payment on an installment note:

The amount that goes to interest expense decreases.

Financial leverage is best measured by which of the following ratios?

The debt to equity ratio.

Which of the following ratios measures financial leverage?

The debt to equity ratio.

The issue price of a bond is calculated as:

The present value of the bond's face amount plus the present value of its periodic interest payments.

The price of a bond is equal to

The present value of the face amount plus the present value of the stated interest payments.

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate the carrying value of the bonds after the first semiannual interest payment.

$52,091

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate interest expense as of the first semiannual interest payment.

$785.

Callable bonds:

Provide potential benefits to the issuer.

A company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. After the first month's payment, what is the balance of the note?

$29,769

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Calculate the issue price of the bonds, assuming a market interest rate of 5%.

$47,812

A company needs construction equipment to complete a project over the next 20 months. The equipment costs $10,000. Instead of purchasing the equipment with a 12% note, the company leases the equipment with payments of $300 due at the end of each month. For what amount would the company record the lease liability at the beginning of the lease?

$5,414.

Airline Accessories obtains a $100,000, three year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded for interest expense for the first full month?

$500

A company leases an office building for 24 months. At the beginning of the lease period, the lessee (user) would:

All of the answers are correct.

The market interest rate of a bond is:

An implied rate based on the price investors pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.

The cash paid for interest on bonds payable is calculated as:

Face amount times the stated interest rate.

If bonds are issued at a discount, interest expense will be

Higher than cash interest paid.

Convertible bonds

Provide potential benefits to both the issuer and the investor.

Convertible bonds:

Provide potential benefits to both the lender and the borrower.

Which of the following is not a primary source of long-term debt financing?

Accounts payable.

A company purchased new equipment for $31,000 with a two-year installment note requiring 5% interest. The required monthly payment is $1,360. For the first month's payment, what is the amount to record for interest expense?

$129.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the first full month?

$2,542

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at

A premium.

Which of the following is true regarding a company assuming more debt?

Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds.

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds' carrying value will be

At face amount.

Serial bonds are

Bonds that mature in installments.

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will:

Both decrease.

Which of the following is true for bonds issued at a discount?

The market interest rate is greater than the stated interest rate.

Bonds issued at a discount are:

issued below face value

Which of the following is not an advantage of debt financing?

Debt financing often has no maturity date.

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as the reduction in principal for the second month?

$2,555

Airline Accessories obtains a $100,000, three-year loan, at 6% interest, with monthly payments of $3,042. What amount would be recorded as interest expense in the second month?

$487

Douglas County Fairgrounds retires a $50 million bond issue when the carrying value of the bonds is $52 million, but the market value of the bonds is only $47 million. The entry to record the retirement will include:

A credit of $5 million to gain on early extinguishment.

Which of the following typically represents an advantage of leasing over purchasing an asset with an installment note?

All of the answer choices are advantages of leasing.

When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds?

Carrying value and interest expense remain unchanged.

A company's capital structure refers to:

Its mixture of liabilities and stockholders' equity

An advantage of leasing an asset rather than purchasing the asset is:

Leases typically require less cash upfront to begin using the asset.

Animal World issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Animal World decides to call the bonds. The company estimates that over the next eight years, they will save $16 million of cash interest. The journal entry to retire the bonds will include a:

Loss of $2 million.

Which of the following definitions describes a serial bond?

Matures in installments.