Intermediate Accounting 2
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 (round the result to whole dollars). $100,000 $107,000 $115,589 $81,307
$115,589
On January 1, 20X1, 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 payable of $260,000. $200,000. $212,000.
$200,000
On January 2, 20X1, 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 (round the result to whole dollars). $200,000 $183,777 $215,567 $217,966
$217,966
The following selected information pertains to 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 1.47. 1.27. 1.32. 0.79.
1.32.
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is 12.5%. 15%. 13.75%.
12.5%.
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on shareholders' equity expressed as a percentage is 12.50%. 13.75%. 27.78%. 33.33%.
27.78%.
Which of the following statements is correct? A. Bonds may sell below, above, or at their face amount. B. Bonds sell for their face amount if they are issued near the original interest date. C. Bonds always sell for their face amount.
A. Bonds may sell below, above, or at their face amount.
Which of the following statements regarding convertible bonds subsequent to issuance is correct? Accounting is different than for nonconvertible bonds. Accounting is the same as for nonconvertible bonds.
Accounting is the same as for nonconvertible bonds.
The specific promises made to bondholders are described in a document referred to as a bond A. warrant. B. debenture. C. indenture. D. option contract.
C. indenture.
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n) A. secured bond B. debenture bond C. serial bond D. indenture bond
Debenture Bond
Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct? Debit cash for $800,000; credit bonds payable for $800,000. Debit cash for $749,000; debit loss on bonds payable for $51,000; credit bonds payable for $800,000. Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.
Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.
A bond that sells for less than its face amount is sold at a ________
Discount
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
True or false: If a company elects the fair value option, it must report all of its financial instruments at fair value.
False
The specific promises made to bondholders are described in a document called a bond _______.
Indenture
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. Interest paid is equal to the effective interest rate multiplied by the maturity value. Interest recorded is equal to the effective interest rate multiplied by the issue price.
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
Which of the following statements regarding the fair value option is correct? It must be applied to all financial instruments in the same category. It must be applied to all or none of the financial assets and liabilities. It can be applied on an "instrument-by-instrument" basis.
It can be applied on an "instrument-by-instrument" basis.
Which of the following is true regarding a debenture bond? It is secured by an outside third party. It is secured by the issuer's long-term assets. It is secured by the faith and credit of the issuer.
It is secured by the faith and credit of the issuer.
The return on assets is calculated by dividing _______ _______ by total assets.
Net Income
The return on shareholders' equity is calculated by dividing ________ ________ by total shareholders' equity.
Net Income
Schulz Company borrows cash from a bank and signs a promissory note. The bank should record notes payable notes receivable accounts receivable accounts payable
Notes Receivable
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 must be paid Periodic interest is incurred Periodic principal payments must be made
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. Peter should not recognize any interest until April 1, 20X2. Peter should recognize 6 months of interest.
Peter should recognize 3 months of interest.
Generally, liabilities are valued at their
Present value
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) Factoring bonds through a licensed factor. Purchasing bonds on an open market. Including a call feature when the bonds are issued
Purchasing bonds on an open market. Including a call feature when the bonds are issued
On January 2, 20X1, 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 Increase the cash proceeds and increase the discount and debt issue costs account Reduce the cash proceeds and increase the bonds payable account
Reduce the cash proceeds and increase the discount and debt issue costs account
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to
Repay a certain amount at a specific date.
Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums? The method can be used if a company irrevocably elects the method on the bond issue date. The method can only be used if it produces results that are not materially different from those produced by the effective interest method. The method is not permitted under current U.S. GAAP.
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 is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? The value of the conversion feature is not recognized separately. The value of the conversion feature is recognized as additional paid-in capital.
The value of the conversion feature is not recognized separately.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) The warrants can be exercised separately from the bonds. The warrants can be sold by the bondholder to another investor. The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock.
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? Bonds with detachable warrants typically sell for less than convertible bonds. The warrants give the holder the option to purchase additional bonds at a favorable price. The warrants can be separated from the bonds.
The warrants can be separated from the bonds.
Select all that apply Which of the following are correct regarding bonds? They obligate the issuing company to repay the bonds when market interest rates decrease. They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds when interest rates increase. They obligate the issuing company to pay an estimated amount.
They obligate the issuing company to repay the bonds at a specific date. 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? (Select all that apply.) To provide investors with a means for diversifying investment risk. To enable smaller or debt-heavy companies to gain access to the bond market. To sell the bonds at a higher price. To use a medium of exchange in mergers and acquisitions.
To enable smaller or debt-heavy companies to gain access to the bond market. To sell the bonds at a higher price. To use a medium of exchange in mergers and acquisitions.
True or false: The interest rate stated in a note is typically equal to the market rate.
True
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as _______ coupon bonds
Zero
Which of the following are true regarding zero-coupon bonds? (Select all that apply.) Zero-coupon bonds issue at deep discounts. Zero-coupon bonds are interest free. Zero-coupon bonds do not pay interest.
Zero-coupon bonds issue at deep discounts. Zero-coupon bonds do not pay interest.
Select all that apply Periodic payments on installment notes typically include installment fees. a portion that reflects interest at the effective interest rate. a portion that reflects interest at the stated interest rate. a portion that reduces the outstanding loan balance.
a portion that reflects interest at the effective interest rate. a portion that reduces the outstanding loan balance.
When an accounting period ends between interest dates, interest should be ignored until the next interest payment date accrued since the last interest date prepaid
accrued since the last interest date
Grunwald elected to report it bonds at fair value. During the current year the fair value of the bonds increased due to changes in the related credit risk. Grunwald should report the gain by disclosing it in the financial statement notes as part of net income as a reduction in interest expense as part of OCI
as part of OCI
On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on January 1 and July 1. On December 31, 20X1, the company should credit bond discount for $800. interest expense for $7,800. interest expense for $7,000.
bond discount for $800.
Which of the following is a common factor that affects the fair value of a company's bonds? changes in current market rates changes in global currency rates changes in the stock fair value of the company's common stock
changes in current market rates
A bond feature that aims at making the bonds more attractive to investors is the ____ feature. redeemable conversion call
conversion
Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should not recognize any premium or additional equity. credit additional paid-in capital—convertible bonds for $10,000. credit premium on bonds payable for $10,000.
credit premium on bonds payable for $10,000.
Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the debt yield ratio. debt ratio. debt to equity ratio. equity yield ratio.
debt to equity ratio.
Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster issued premium bonds issued discounted bonds elected the fair value option classified the bonds as held to maturity
elected the fair value option
The amount of interest paid on bonds is calculated by multiplying ______ of the bonds with the ____ rate. outstanding balance; stated face amount; effective outstanding balance; effective face amount; stated
face amount; stated
Emil Company has $4 million in bonds outstanding. During the current year, the applicable market interest rate decreases. The fair value of Emil Company's bonds likely will: increase no effect decrease
increase
Jackson Company has $1 million bonds outstanding that were issued to yield 5%. During the year, the market interest rate decreases. The fair value of Jackson's bonds likely will increase. stay the same. decrease.
increase.
The fundamental reason why companies issue convertible bonds is to . ward off hostile takeovers. make the bonds more attractive to investors. improve their debt equity ratio.
make the bonds more attractive to investors.
The interest rate on notes payable typically is equal to the ____ rate. prime credit market short-term borrowing
market
Changes in the current ______ often represent a major contributor to changes in the fair value of bonds. stated interest rate coupon interest rate market interest rate
market interest rate
Bonds that do not include a call provision may be repurchased on the open market must be outstanding until maturity cannot be retired prior to the maturity date
may be repurchased on the open market
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 reduce reporting costs. be easier to apply. mislead investors. improve net income.
mislead investors.
Accounting for convertible bonds subsequent to issuance is the same as accounting for _____. common stock non-convertible bonds bonds with detachable warrants
non-convertible bonds
Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit cash notes payable accounts payable bonds payable
notes payable
Gertrude Company receives $15,200 relating to its installment note receivable; of this amount $9,000 represents interest. In its statement of cash flows, this inflow should be reported as a(n) investing activity inflow of $15,200. operating activity inflow of $9,000. operating activity inflow of $15,200. investing activity inflow of $6,200.
operating activity inflow of $9,000. investing activity inflow of $6,200.
In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n) financing activity. operating activity. investing activity.
operating activity.
A bond investor who applies the effective interest method calculates interest revenue based on the _____ balance of the bonds times the _____ interest rate. outstanding; stated outstanding; effective maturity; effective effective; stated
outstanding; effective
The primary purpose of the call feature associated with bonds is to allow investors to regain control over their invested funds. protect the issuer against declining interest rates. exchange the bonds for another type of financing source.
protect the issuer against declining interest rates.
Select all that apply Bond issue costs do not affect the cash proceeds from the issuance of debt. reduce the cash proceeds from the issuance of debt. increase the cash proceeds from the issuance of debt. decrease the effective interest rate of borrowing. increase the effective interest rate of borrowing.
reduce the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing.
Installment notes typically involve the purchase of assets and (Select all that apply.) require installment payments over time. periodic payments include principal and interest. require periodic payments of interest and payment of the loan at maturity. defer interest payments until maturity.
require installment payments over time. periodic payments include principal and interest.
When we multiply the face amount of bonds with the stated interest rate, we calculate the amount of interest paid interest expense or revenue
the amount of interest paid
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 return on the company's debt return on the company's equity interest rate stated on the note
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 interest rate stated in the note. value of the purchased equipment. maturity amount of the note.
value of the purchased equipment.
