Smartbook Ch 9

***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: Carrying value of $101,200 Bonds payable of $100,000 Less discount on bonds payable of $1,200

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

The journal entry to recognize the signing of an installment notes payable includes: -Credit Notes Payable -Credit Cash -Debit Notes Payable -Debit Cash

Credit Notes Payable Debit Cash

Convertible bonds allow the lender to convert each bond into: preferred stock common stock secured bonds

common stock

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

convertible

If bonds are retired before the maturity date, this is considered a(n) contingent liability. discontinued operation. extraordinary item. early extinguishment of debt.

early extinguishment of debt.

On the maturity date, the carrying value of bonds issued at a premium will be equal to the issue price. face amount. discount amount.

face amount.

Premium bonds

Interest expense decreases each interest period

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

market

A common reason for redeeming a bond prior to its maturity date is that the market price of bonds decreased. market interest rates increased. market interest rates decreased.

market interest rates decreased.

An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the ___ date.

maturity

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

secure

Corporate bonds most often pay interest ___.

semiannually

Most bonds issued today are ______. convertible secured serial unsecured

unsecured

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

term; serial

***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 $4,500 $204,500 $200,000

$195,500

***A bond will be issued at a premium when the market rate of interest is ______ the stated rate. the same as less than greater than

less than

***The true interest rate used by investors to value a bond issue is referred to as the: nominal interest rate stated interest rate market interest rate prime interest rate

market interest rate

***When a corporation repurchases its bonds from the bondholders, the corporation ___ the bonds.

retired

***Callable bonds can be redeemed at the choice of the bond issuer. the bondholder. both the bond issuer and bondholder.

the bond issuer.

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n) ___ bond.

unsecured

A corporation that wishes to borrow from the general public rather than a bank will issue common stock. preferred stock. bonds. notes payable.

bonds.

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

contra-liability

The Discount on Bonds Payable account is classified as a(n) expense. asset. loss. contra-liability.

contra-liability.

The two types of financing are operating financing. investing financing. debt financing. equity financing.

debt financing. equity financing.

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

stated

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

stated

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

term

Which of the following are common characteristics or provisions of bonds? convertible perpetual or periodic callable secured or unsecured free or redeemable

convertible callable secured or unsecured

Most corporate bonds pay interest monthly. quarterly annually semiannually.

semiannually.

An investment fund into which an organization makes payments each year over the life of its outstanding debt is referred to as a(n) ___ fund.

sinking

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as serial bonds term bonds convertible bonds

term bonds

Callable bonds can be redeemed at the choice of the bondholder. both the bond issuer and bondholder. the bond issuer.

the bond issuer.

***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 Debit interest expense $6,000 Debit interest expense $5,705 Credit discount on bonds payable $705 Credit cash $6,000

Credit cash $5,000 Debit interest expense $5,705 Credit discount on bonds payable $705 Reason: Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a: debit to Prepaid Interest for $2,400 credit to Notes Payable for $24,000 credit to Notes Payable for $26,400 debit to Notes Payable for $24,000

credit to Notes Payable for $24,000

Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include: debit to Cash credit to Bonds Payable debit to Premium on Bonds Payable credit to Premium on Bonds Payable credit to Interest Revenue

debit to Cash credit to Bonds Payable credit to Premium on Bonds Payable

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

secured

Slater Company issues $1 million face amount bonds for $1.1 million. On the date of maturity, the carrying value of the bonds (assuming that interest has already been accrued) will be equal to $1 million. $1.2 million. $1.1 million.

$1 million.

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing: Internal Sales Debt Equity

Debt

Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at: a premium a discount the face amount

a discount

Discounted bonds

interest expense increases each interest period

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.

lease

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n) direct purchase plan. lease. contingent contract. indenture.

lease.

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: A debit to loss on bond issuance for $2,000 Discount on bonds payable for $2,000 Cash for $100,000 Cash for $98,000

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

***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 discount on bonds payable for $2,000 A debit to loss on bond issuance A credit to bonds payable for $100,000

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

Which of the following statements is correct? Bonds can be retired only at maturity. Bonds may be retired at maturity or retired early. Bonds for which the effective interest rate rises must be retired early.

Bonds may be retired at maturity or retired early.

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 ______. Notes Payable; Cash Cash; Bonds Receivable Cash; Bonds Payable Bonds Payable; Cash

Cash; Bonds Payable

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? Debit interest expense $12,000 Credit cash $5,000 Credit cash $6,000 Debit interest expense $10,000

Credit cash $5,000 Reason: $100,000 x 10% x 6/12

Which of the following is true regarding a debenture bond? It is secured by the issuer's long-term assets. It is secured by the faith and credit standing of the issuer. It is secured by an outside third party.

It is secured by the faith and credit standing of the issuer.

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

The issue price will be above the bond's face value. The 6% interest rate makes the bond more attractive and investors are willing to pay more.

***Which of the following are the most common types of bonds? Convertible Secured Unsecured

Unsecured

Which of the following are the most common types of bonds? Unsecured Secured Convertible

Unsecured

In a private placement of bonds, bonds may be sold to a single large investor. the general public. an underwriter who sells it to individual investors.

a single large investor.

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) maturable asset. common stock. bond. obligation payment.

bond.

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

debt; equity

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

a credit to Cash of $6,000 a debit to Interest expense of $6,000 Reason: Since no previous adjusting entry was recorded to accrue interest, there would be no Interest payable balance to decrease.

***On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following? Debit to interest expense $3,211 Credit cash $4,000 Debit premium on bonds payable $789 Debit to interest expense $4,000 Credit to interest expense $3,211

Debit to interest expense $3,211 Credit cash $4,000 Debit premium on bonds payable $789 Reason: Semi-annual interest rate = 6%/2 = 3% x $107,020.

***If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries? A credit to Premium on Bonds Payable of $10,000 A debit to Cash of $110,000. A debit to interest expense of $10,000. A debit to Cash of $90,000. A credit to Bonds payable of $100,000

A credit to Premium on Bonds Payable of $10,000 A debit to Cash of $110,000. A credit to Bonds payable of $100,000

___ financing refers to borrowing money from creditors.

debt

Periodic payments on installment notes typically include (Select all that apply.) a portion that reflects interest. an increase in stockholders' equity a portion that reduces the outstanding loan balance. installment fees.

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

***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 $99,000 and to Premium on bonds payable of $1,000. -debit to Cash of $100,000 and a credit to Bonds payable of $100,000. -debit to Bonds payable of $100,000 and a credit to Cash of $100,000.

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

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

private

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: $204,500 $4,500 $195,500 $200,000

$195,500

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 bonds payable risk investment risk business risk

default risk

Katie Company has outstanding bonds due in four years. Katie Company regularly deposits money in an investment account; these accumulated funds will be used to pay off the bonds in four years. Katie apparently has a retirement fund. mortgage fund. sinking fund.

sinking fund.

***On January 2, 2018, Schneider Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest recognized on June 30, 2018, using the effective interest method, will be equal to (round to the nearest full dollar) $2,875. $3,000. $3,354.

$3,354. Reason: 95,842 x 0.035

***ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018 (rounded to the nearest dollar)? $5,000 $12,000 $10,000 $6,000 $5,537

$5,000 Reason: Payment to bondholders = $100,000 x 10% x (6/12) = $5,000; Interest expense is $5,537 (=92,280 x 12% (6/12)). The difference of $537 is the amortization of the discount.

***On January 2, 2018, 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 bond issues for $191,684 with an effective interest rate of 7%. Interest expense on June 30, 2018, using the effective interest method, will be equal to (round to whole dollars) $6,000. $5,751. $6,709.

$6,709. Reason: 191,684 x 0.035 (7% semiannually)

***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 $6,000 a credit to Cash of $500 a credit to Interest payable of $500 a credit to Cash of $6,000 a debit to Interest expense of $500

-a credit to Interest payable of $500 -a debit to Interest expense of $500 Reason: The interest payment will be made on December 31, not January 31.

On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following? Debit to interest expense $3,211 Credit to interest expense $3,211 Debit to interest expense $4,000 Debit to bonds payable $4,000

Debit to interest expense $3,211 Reason: Semi-annual interest rate = 6%/2 = 3% x $107,020.

***On January 1, ABC, Inc., issued $100,000 of 10%, 5-year bonds, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash? -The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate. -The debit to Interest Expense will be greater because the market rate is less than the stated interest rate. -The debit to Interest Expense will be less because the market rate is greater than the stated interest rate. -The debit to Interest Expense will be lower because the market rate is less than the stated interest rate.

The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate. Reason: The bond sold at a discount because the stated rate of 10% is lower than the market rate of interest. The debit to Interest Expense will be greater because it is based on the market rate. The credit to Cash will be less because it is based on the lower stated interest rate.

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

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

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at a discount. face amount. a premium.

a premium.

Which of the following are common characteristics or provisions of bonds? convertible term or serial indefinite or redeemable secured or unsecured perpetual or periodic

convertible term or serial secured or unsecured

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

The carrying value at maturity is equal to the face amount of bonds issued at: face amount only discount and premium only face amount, discount, and premium face amount and discount only face amount and premium only

face amount, discount, and premium

Bonds will be issued a premium if the stated interest rate is less than the market interest rate. fluctuating on the day of issuance. equal to the market interest rate. greater than the market interest rate.

greater than the market interest rate.

***A bond will be issued at a discount when the market rate of interest is less than the stated rate. greater than the stated rate. the same as the stated rate.

greater than the stated rate.

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

installment

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