ACCT 2301- Accounting Ch 09

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. (Enter one word per blank)

lease

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 bonds payable for $100,000

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 ( 100000 x .10 x 6/12)

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 Reason: The stated rate is not always equal to the market rate of interest.

Most corporate bonds pay interest

Semiannually

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.

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

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

premium

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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

debt and equity

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate

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:

Discount on bonds payable for $2,000 ( discount is a contra-liability, not a loss) Cash for $98,000 (discount reduces cash received)

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.

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 Cash of $6,000 (interest expense should be debited, not credited. The credit is to Cash) a debit to Interest expense of $6,000 (since no previous adjusting entry was recorded to accrue interest, there would be no Interest payable balance to decrease. The debit is to Interest expense and a credit to Cash for $6000)

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 credit to Interest payable of $500 a debit to Interest expense of $500

Periodic payments on installment notes typically include (Select all that apply.)

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

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 credit to Bonds payable of $100,000

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.

False Reason: The debt to equity ratio is total liabilities divided by total owners' equity.

Corporate bonds most often pay interest

Semiannually

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.

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 Reason: The two components for pricing a bond are the interest payments and the repayment of principal.

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

convertible

The two types of financing are

debt financing and equity financing

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 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

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

discount

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate.

The ____ rate of interest on a bond is the interest rate printed on the bond, whereas the ____ rate of interest is the current rate of interest being paid on investments with similar characteristics.

stated; market

The price of a bond includes

the present value of the face amount plus the present value of the periodic interest payments

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

installment (installment, installments, or installement)

A bond will be issued at a premium when the market rate of interest is ______ the stated rate.

less than

Callable bonds can be redeemed at the choice of

bond issuer

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?

credit cash $4,000 (semi-annual int rate-6%/2=3%x$107,020) Debit premium on bonds payable $789 (semi annual int rate=6%/2=3%x$107,020) Debit to interest expense $3,211 (semi-annual int rate = 6%/2=3%x$107,020)

Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:

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

The ____ rate of interest is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense. (Enter one word per blank)

stated (coupon, nominal)

The ____ rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)

stated (nominal)

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

stated (nominal, coupon, face)

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 Rationale: 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.

Which of the following statements is correct?

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 ( the entry to record the issuance of bonds includes a debit to Cash and a credit to Bonds Payable) Bonds Payable ( the entry to record the issuance of bonds includes a debit to Cash and a credit to Bonds Payable. Bonds Receivable would not be credited unless you had previously loaned money and are getting paid back)

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 $5,705 Credit discount on bonds payable $705 Credit cash $5,000

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

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)

bond

Convertible bonds allow the lender to convert each bond into:

common stock

The Discount on Bonds Payable account is classified as a(n)

contra liability

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

contra liability

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.

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased.

When a corporation repurchases its bonds from the bondholders, the corporation ____ the bonds

retired