accounting chapter 9

bonds: convertible

allow the investor to convert each bond into a specific number of shares of common stock

bond

formal debt instrument issued by a company to borrow money

3 sources of debt

notes, leases, bonds

equity financing

obtaining investment from stockholders (stockholders equity)

most bonds are....

unsecured

debt financing

borrowing money from creditors (liabilities)

journal entry for bonds issued at a premium

debit cash, credit bonds payable (face value), credit premium on bonds payable

Interest expense is calculated using what rate?

MARKET rate

installment payment

includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance

For a bond issued at a discount, carrying Value _______ over time

INCREASES

issue price

amount investors pay cash to the company on the issue date

decrease in carrying value=

(cash paid) - (carrying value x interest rate)

what do callable bonds protect?

the issuing company from future decreases in interest rates... if they decline the company can buy back the high-interest-rate bonds at a fixed price and issue new bonds at the new, lower interest rate price

Item17 3.7 points Time Remaining 11 minutes 10 seconds 00:11:10 Item 17 Item 17 3.7 points Time Remaining 11 minutes 10 seconds 00:11:10 If bonds are issued at a discount, interest expense will be Lower than cash interest paid. Higher than cash interest paid. Equal to cash interest paid. Lower or higher depending on current market interest rates.

Higher than cash interest paid.

bonds: serial

require payments in installments over a series of years EX: a $20 million bond is issued and $2 is due each year for 10 years

bonds: term

requires payment of the full principal amount of the bond on a single date

If bonds are issued at a premium, over the life of the bonds, the carrying value and interest expense will: Multiple Choice Both increase. Both decrease. Carrying value will increase and interest expense will decrease. Carrying value will decrease and interest expense will increase.

Both decrease.

The cash paid for interest on bonds payable is calculated as: Multiple Choice Face amount times the stated interest rate. Carrying value times the market interest rate. Face amount times the market interest rate. Carrying value times the stated interest rate.

Face amount times the stated interest rate.

If bonds are issued at a discount, over the life of the bonds, the carrying value will: Increase. Decrease. Stay the same. Depend on the current market interest rate.

Increase.

if bonds are issued at a discount, over the life of the bonds, interest expense will: Decrease. Increase. Remain unchanged. The effect cannot be determined from the information given.

Increase.

pros of debt financing

-Interest payments that a firm makes on debt are a tax-deductible expense -Enables the firm to acquire additional funds without requiring existing stockholders to invest more of their own money or the sale of stock to new investors

who benefits from callable bonds

benefit issuer

when bonds issue at face amount, the carrying value interest expense are ______ over time

constant

When bonds are issued at face amount, what happens to the carrying value and interest expense over the life of the bonds? Multiple Choice Carrying value and interest expense increase. Carrying value and interest expense decrease. Carrying value and interest expense remain unchanged. Carrying value increases and interest expense decreases.

Carrying value and interest expense remain unchanged.

bonds: secured

bonds are backed by collateral EX: signing a mortgage agreement for buying a house

bonds: unsecured

bonds are not backed by collateral

what is the difference between a bond and a note

bonds are usually for greater amounts and are issued to many lenders while notes are issued to a single lender like a bank

most corporate bonds are...

callable (redeemable)

journal entry for bond at discount

debit cash, debit discount on bonds payable, credit bonds payable

journal entry of an installment note (payment if monthly installment note)

debit interest expense, debit notes payable (difference between cash and interest expense)

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at A premium. Face amount. A discount. A discount or premium depending on the maturity date.

premium

market interest rate

implied rate based on the price investors are willing to pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond

For a bond issued at a premium, carrying Value _______ over time

DECREASES

Outdoor Adventures issues bonds at a discount. On the maturity date, the bonds carrying value will be:

at face amount

The issue price of a bond is calculated as: Multiple Choice The bond's face amount to be paid at maturity. The present value of the bond's face amount to be paid at maturity. The present value of the bond's periodic interest payments over the life of the bond. The present value of the bond's face amount plus the present value of its periodic interest payments.

The present value of the bond's face amount plus the present value of its periodic interest payments.

sinking fund

an investment fund to which an organization makes payments each year over the life of its outstanding debt

who benefits from a convertible bond?

issuer and investory

bonds: callable

issuing company can pay off bonds early at a specified call price