Smartbook Ch 14
When an accounting period ends between interest dates, interest should be
accrued since the last interest date
Grunwald elected to report its 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:
as part of OCI.
Which of the following purchases frequently involve installment notes payable?
buildings automobiles
Which of the following is a common factor that affects the fair value of a company's bonds?
changes in current market rates
A bond feature that aims at making the bonds more attractive to investors is the ____ feature.
conversion
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as _______ bonds.
convertible
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as _________ bonds.
convertible
Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster
elected the fair value option
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
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.
Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit
notes payable
If a company elects the fair value option for its bonds, related gains and losses that arise from changes to credit risk are reported as:
other comprehensive income
Using the effective interest method, the bond issuer calculates interest expense based on the:
outstanding balance of the bonds
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.
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as __________ coupon bonds
zero
Premium
A bond that sells for more than its face amount
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).
$115,589 Reason: (100,000 x 0.61027) + (3,500 x 15.58916)
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).
$217,966 Reason: (200,000 x 0.82035) + (6,000 x 8.98259)
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
Which of the following statements regarding convertible bonds subsequent to issuance is correct?
Accounting is the same as for nonconvertible bonds.
Which of the following statements is correct?
Bonds may sell below, above, or at their face amount.
True or false: If a company elects the fair value option, it must report all of its financial instruments at fair value.
False
Which of the following represent the typical characteristics of liabilities?
Future cash payments are certain or estimable. Interest accrues as time passes on long-term liabilities. The requirement of future cash payments.
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 the open market.
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.
Which of the following statements regarding the fair value option is correct?
It can be applied on an "instrument-by-instrument" basis.
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit of the issuer.
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 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
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 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.
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.
Which of the following are correct regarding bonds?
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?
To sell the bonds at a higher price. To enable smaller or debt-heavy companies to gain access to the bond market. 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 Reason: The rate is typically negotiated at the time of the loan so the two are equal.
Which of the following are true regarding zero-coupon bonds?
Zero-coupon bonds do not pay interest.
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
credit premium on bonds payable for $10,000.
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n)
debenture bond
A bond that sells for less than its face amount is sold at a
discount
Bond issue costs
increase the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.
The specific promises made to bondholders are described in a document referred to as a bond
indenture
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 $6,200. operating activity inflow of $9,000.
The fundamental reason why companies issue convertible bonds is to
make the bonds more attractive to investors.
The interest rate on notes payable typically is equal to the ____ rate.
market
Changes in the current ______ often represent a major contributor to changes in the fair value of bonds.
market interest rate
Generally, liabilities are valued at their
present value
A company that recognizes a long-term notes payable has signed the legal document referred to as a _______ note.
promissory
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to
repay a certain amount at a specific date.
Installment notes typically involve the purchase of assets and
require installment payments over time. periodic payments include principal and interest.
An early extinguishment of debt refers to long-term liability such as bonds that are
retired prior to maturity
On January 1, 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
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
$200,000
Discount
A bond that sells for less than its face amount
Which of the following correctly describes a bond indenture?
A document detailing the promises made by the bond issuer.
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 $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.
Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct?
Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.
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.
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
Accounting for convertible bonds subsequent to issuance is the same as accounting for _____.
non-convertible bonds
In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n)
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; effective
The primary purpose of the call feature associated with bonds is to
protect the issuer against declining interest rates.