Accountancy 1 Chapter 9

Riley Company borrowed $36,000 on April 1, 2016 from the Titan Bank. The note issued by Riley carried a one year term and a 5% annual interest rate. Riley earned cash revenue of $1,020 in 2016 and $950 in 2017. Assume no other transactions. What is the net income on the 2017 income statement?

$500 $36,000 × 5% × 3/12 months = $450 interest expense; $950 revenue - $450 interest expense = $500 net income

serial bond

A serial bond is a bond issue that is structured so that a portion of the outstanding bonds mature at regular intervals until all of the bonds have matured.

term bond

A term bond refers to bonds from the same issue that share the same maturity dates

Characteristics of a convertible bond

Bonds may be exchanged for stock at the discretion of the bondholder.

Bonds payable are usually classified on the balance sheet as:

Long term liabilities

If the stated interest rate for bonds is the same as the effective interest rate, the bonds will be issued at their face value. True False

True

Williams Company issued $200,000 of callable bonds at face value on January 1, 2016. The bonds carried a 2% call premium. If Williams calls the bonds, this event would: decrease equity by $4,000. decrease liabilities by $200,000. decrease assets by $204,000. all of these answer choices are correct.

all of these answer choices are correct

Callable bonds

called for early retirement at the option of the issuer.

unsecured bonds are called

debenture bonds

secured bond

means that you actually pay money or bail property to secure your release

Riley Company borrowed $36,000 on April 1, 2016 from the Titan Bank. The note issued by Riley carried a one year term and a 5% annual interest rate. Riley earned cash revenue of $1,020 in 2016 and $950 in 2017. Assume no other transactions. The amount of cash flow from operating activities that would appear on the 2017 statement of cash flows would be:

$ 850 outflow $36,000 × 5% = $1,800 cash paid for interest on the note; $950 inflow from revenue - $1,800 outflow for interest = $850 outflow for operating activities. The repayment of principal is a financing activity.