ACCT 251 - Chapter 9

Financing with ____ requires borrowing, whereas financing with ____ requires issuing shares of stock. (Enter one word per blank.)

debt, liabilities, or liability; equity

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as: a. default risk b. bonds payable risk c. investment risk d. business risk

a. default risk

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

a. greater than the market interest rate.

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

installment, instalment, installments, or installement

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 ______. a. Notes Payable; Cash b. Cash; Bonds Receivable c. Cash; Bonds Payable d. Bonds Payable; Cash

c. Cash; Bonds Payable

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

c. market interest rate

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

contra; liability

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

convertible

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? a. Debit to interest expense $4,000 b. Debit to bonds payable $4,000 c. Credit to interest expense $3,211 d. Debit to interest expense $3,211

d. Debit to interest expense $3,211

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. (Enter one word per blank)

stated, coupon, or nominal; market or effective

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

d. bonds.

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

d. contra-liability.

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)? a. $5,000 b. $10,000 c. $6,000 d. $12,000 e. $5,537

a. $5,000

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

retired

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

a. True

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? a. The issue price will equal the bond's face value. b. The issue price will be below the bond's face value. c. The issue price will be above the bond's face value.

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

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

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

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. a. True b. False

a. True

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

b. Bonds may be retired at maturity or retired early.

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? a. The debit to Interest Expense will be less because the market rate is greater than the stated interest rate. b. The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate. c. The debit to Interest Expense will be greater because the market rate is less than the stated interest rate. d. The debit to Interest Expense will be lower because the market rate is less than the stated interest rate.

b. The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.

Select all that apply 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. a credit to Cash of $6,000 b. a debit to Interest payable of $6,000 c. a credit to Interest expense of $6,000 d. a debit to Interest expense of $6,000

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

Select all that apply Which of the following are correct regarding bonds? a. They obligate the issuing company to repay the bonds when interest rates increase. b. They obligate the issuing company to repay the bonds when market interest rates decrease. c. They obligate the issuing company to repay the bonds at a specific date. d. They obligate the issuing company to pay an estimated amount. e. They obligate the issuing company to pay a specific amount.

c. They obligate the issuing company to repay the bonds at a specific date. e. They obligate the issuing company to pay a specific amount.

Select all that apply 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? a. Credit discount on bonds payable $705 b. Debit interest expense $5,705 c. Credit cash $5,000 d. Credit cash $6,000 e. Debit interest expense $6,000

a. Credit discount on bonds payable $705 b. Debit interest expense $5,705 c. Credit cash $5,000

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

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

Select all that apply Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include: a. credit to Bonds Payable b. credit to Premium on Bonds Payable c. credit to Interest Revenue d. debit to Premium on Bonds Payable e. debit to Cash

a. credit to Bonds Payable b. credit to Premium on Bonds Payable e. debit to Cash

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

a. less than

Most corporate bonds pay interest a. semiannually. b. annually c. monthly. d. quarterly

a. semiannually.

The debt to equity ratio is calculated as a. total liabilities divided by total stockholders' equity. b. current liabilities divided by total stockholders' equity. c. noncurrent liabilities divided by current liabilities + stockholders' equity. d. long-term debt divided by total stockholders' equity.

a. total liabilities divided by total stockholders' equity.

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. a debit to Interest expense of $6,000 b. a credit to Cash of $500 c. a credit to Interest payable of $500 d. a debit to Interest expense of $500 e. a credit to Cash of $6,000

c. a credit to Interest payable of $500 d. a debit to Interest expense of $500

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

c. market interest rates decreased.

The rate of interest printed on the face of a bond is referred to as the interest rate. (Enter one word per blank)

stated, nominal, coupon, or face

Select all that apply 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. A debit to interest expense of $10,000. b. A credit to Bonds payable of $100,000 c. A debit to Cash of $90,000. d. A credit to Premium on Bonds Payable of $10,000 e. A debit to Cash of $110,000.

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

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

b. a premium.

Select all that apply Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include: a. A credit to bonds payable for $100,000 b. A credit to discount on bonds payable for $2,000 c. A debit to discount on bonds payable for $2,000 d. A debit to loss on bond issuance

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

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

a. greater than the stated rate.

Select all that apply 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. Cash for $100,000 b. Cash for $98,000 c. A debit to loss on bond issuance for $2,000 d. Discount on bonds payable for $2,000

b. Cash for $98,000 d. d. Discount on bonds payable for $2,000

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. a. True b. False

b. False

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

b. a discount

Convertible bonds allow the lender to convert each bond into: a. preferred stock b. common stock c. secured bonds

b. common stock

Select all that apply The two types of financing are a. operating financing. b. debt financing. c. equity financing. d. investing financing.

b. debit financing. c. equity financing.

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

b. the bond issuer.

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) a. direct purchase plan. b. indenture. c. contingent contract. d. lease.

d. lease

The price of a bond includes a. the present value of the face amount b. the present value of the face amount minus the present value of c. the periodic interest payments c. the present value of the periodic interest payments d. the present value of the face amount plus the present value of the periodic interest payments

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