ACC 210 Exam 3
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
bond
Callable bonds can be redeemed at the choice of
bond issuer
A corporation that wishes to borrow from the general public rather than a bank will issue
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)
contra-liability.
_________ bonds are retired when the bondholder exchanges them for the issuing company's stock.
convertible
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of
financial risk
Bonds will be issued at a premium if the stated interest rate is
greater than the market interest rate.
For a bond issued at a discount, the stated interest rate will be _________ than its yield or return earned by bond investors.
lower
The __________ rate of interest is an implied rate based on the price investors pay to purchase a bond.
market
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
Most long term liabilities are payable in
more than one year
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
Most corporate bonds pay interest
Semiannually
__________ bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
The two types of financing are
equity financing and debt financing
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
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased
The ________ rate of interest is used to compute the cash interest paid to bondholders.
stated
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
___________ bonds are supported by a specific asset the issuer pledges as collateral.
secured
The price of a bond includes
the present value of the face amount plus the present value of the periodic interest payments
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
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
Corporate bonds most often pay interest
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 $500 - A credit to Interest payable of $500
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:
- Cash for $98,000 - Discount on bonds payable for $2,000
Munchin Corporation has $200,000 of 6% bonds that were issued in Year 1 at $202,000. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?
- Credit cash $200,000 - Debit bonds payable $200,000
Candy Corporation has $100,000 of 8% bonds that were issued in Year 1 at face amount. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?
- Debit bonds payable $100,000 - Credit cash $100,000
Identify two ratios commonly used to assess a company's financial risk.
- Times interest earned ratio - Debt to equity ratio
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 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
-debit to Interest expense of $6,000 -credit to Cash of $6,000
Coral Company has the following financial statement information: Current assets $30,000; Noncurrent assets $70,000; Current liabilities $20,000; Noncurrent liabilities $40,000; and Stockholders' equity $40,000. What is the debt to equity ratio?
1.50 (20,000 + 40,000) / 40,000
Linton Company has the following financial statement information: Current assets $20,000; Noncurrent assets $80,000; Current liabilities $20,000; Noncurrent liabilities $60,000; and Stockholders' equity $20,000. What is the debt to equity ratio?
4 ($20,000 + $60,000) / $20,000
Which of the following statements is correct? Multiple choice questions. - 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 ______.
Cash; Bonds Payable
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 (7.72173 x $8,000 x 0.5) + (0.61391 x $100,000) = $92,278
Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:
- A credit to bonds payable for $100,000 -A debit to a discount on bonds payable for $2,000
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
Periodic payments on installment notes typically include
a portion that reduces the outstanding loan balance and a portion that reflects the interest
In a private placement of bonds, bonds may be sold to
a single large investor
commercial paper
a written promise from one company to another to pay a specific amount of money
Convertible bonds allow the lender to convert each bond into:
common stock
Deferred Revenue
A liability created when a business collects cash from customers in advance of completing a service or delivering a product.
Notes Payable
A written promise made by the business to pay a debt, usually involving interest, in the future.
True or false: When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.
True
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.
(5.65022 x $10,000) + (0.32197 x $100,000) = $88,699
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.
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
Interest =
face value x annual interest rate x fraction of the year
The rate of interest printed on the face of a bond is referred to as the ___________ interest rate.
face
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
The carrying value at maturity is equal to the face amount of bonds issued at:
face amount, discount, and premium
The higher the debt to equity ratio is for a company, the ___________ the risk of bankruptcy is for that company.
higher
Loans requiring periodic payments of interest and principal are referred to as ________ notes
installment
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by
interest expense
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)
lease
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
liability
obligation of a company to transfer some economic benefit in the future
Most current liabilities are payable within
one year from the balance date sheet
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ______ placement.
private
When a corporation repurchases its bonds from the bondholders, the corporation _________ the bonds
retires
Mann Inc. issues $100,000 bonds at face amount. The bonds pay interest of 6%. Berkely Inc., a company with comparable risk, issues $100,000 bonds, paying 5% interest for $98,000 Which of the following is true?
Both bonds yield a return of 6% to investors.
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured