mgmt 200 purdue ch 9

Bonds that are backed by collateral are ______.

secured

The ________ rate of interest is used to compute the cash interest paid to bondholders.

stated, nominal or coupon

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a

debit to Cash of $100,000 and a credit to Bonds payable of $100,000.

Financing with _______ requires borrowing, whereas financing with _________ requires issuing shares of stock.

debt equity

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:

default risk

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 6%, the bonds will issue at

face amount

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

A debit to discount on bonds payable for $2,000 A credit to bonds payable for $100,000

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

Debt to equity ratio Times interest earned ratio

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate.

Loans requiring periodic payments of interest and principle are referred to as ________ notes

installment

______ bonds are supported by a specific asset the issuer pledges as collateral.

secured

Corporate bonds most often pay interest

semiannually

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

term

Which of the following are correct regarding bonds?

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

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at

a premium.

Convertible bonds allow the lender to convert each bond into:

common stock

Werner issues bonds at a discount. The related Discount account should be classified as a(n) ________ ______

contra liability

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

convertible

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

convertible callable secured or unsecured

True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.

false

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.

false

True or false: The times interest earned formula is net income divided by interest expense.

false

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

financial

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased.

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ______ placement.

private

Bonds that mature on one specific date are called ______ bonds, whereas bonds that mature in installments are referred to as ______ bonds.

term, serial

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

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

The rate of interest printed on the face of a bond is referred to as the ______ interest rate.

stated, nominal, coupon, or face

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

Cash; Bonds Payable

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price?

The issue price will be above the bond's face value.

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.

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.

a debit to Interest expense of $500 a credit to Interest payable of $500

Periodic payments on installment notes typically include (Select all that apply.)

a portion that reduces the outstanding loan balance. a portion that reflects interest.

In a private placement of bonds, bonds may be sold to

a single large investor.

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

higher

The ______ rate of interest is an implied rate based on the price investors pay to purchase a bond.

market or effective

When a corporation repurchases its bonds from the bondholders, the corporation ______ the bonds.

retired

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

Callable bonds can be redeemed at the choice of

the bond issuer.

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.

a debit to Interest expense of $6,000 a credit to Cash of $6,000

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 7%, the bonds will issue at

a discount.

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

bonds

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 Credit discount on bonds payable $705 Debit interest expense $5,705

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance of the bonds should include debit(s) to:

Discount on bonds payable for $2,000 Cash for $98,000

Identify the characteristics of an annuity.

Equal time periods between payment dates A series of amounts that are equal

A series of equal amounts paid or received over equal time periods is called a(n)

annuity

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

A(n) _______ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)

lease

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

long term debt

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

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value is equal to face amount at the ____ date.

maturity or due

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

A(n) ______ bond is backed by a lien on specified real estate owned by the issuer.

secured

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

secured

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

secured or unsecured convertible term or serial

The two types of financing are

debt financing. equity financing.

Which of the following statements is correct?

Bonds may be retired at maturity or retired early.

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

secured callable bonds convertible bonds term serial bonds

1. Bonds are backed by collateral 2. The issuing company can pay off the bonds at any time 3. Bonds that can be exchanged for shares of stock in the issuing company 4. Bond issue that matures on a single date 5. Bonds that mature in installments

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:

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

The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's ______ risk.

default or insolvency

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by _______ ________ . (Enter one word per blank)

interest expense

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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

The Discount on Bonds Payable account is classified as a(n)

contra-liability