Acct 303 - Ch 14

A _____ bond is backed by a lien on specified real estate owned by the issuer.

Mortgage

What happens with the periodic payment when you have a loan "with lump-sum principal payment at maturity"?

Periodic payment includes only interest

If the discount on a bond is properly amortized, at the maturity date, the discount will be:

$0

Slater Company issues $1 mil face amount bonds for $1.1 mil. On the date of maturity, the carrying value of the bonds (assuming that interest has already been accrued) will be equal to: A. $1 mil. B. $1.1 mil.

$1 million.

On Jan 2, 2013, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and Dec 31. Yves decides to utilize the straight-line method of amortization. On Dec 31, 2013, Yves should credit the "discount on bonds payable" account for $____.

$1,000 $500,000 x (1-.98) / 10

On Jan 2, 2013, Proper Company issues $2,000,000 of 6% bonds. Interest of $60,000 is payable semi-annually on June 30 and Dec 31. The market yield for bonds of similar risk and maturity is 7%. The bonds are issued at 98. What issue price did Proper receive, upon issuance, for its bonds.

$1,960,000 When bond prices are quoted in financial media, they typically are stated in terms of a % of FACE amounts. Thus, a price quote of 98 means a $2,000,000 bond will sell for $1,960,000. So 2000000 x .98 = 1,960,000 ***** A bond priced at 101 would sell for $2,020,000.

Bonds that systematically mature over a series of years are called ____ bonds.

serial

On Jan 2, 2013, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and Dec 31. Yves decides to utilize the straight-line method of amortization. On Dec 31, 2013, Yves should debit interest expense for $____.

$16,000 $500,000 x .06 x (6/12) = $15,000 $15,000 + 1,000 amortization = $16,000

Nattel Corp. issues 10,000 $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Margarita, Inc., purchased 2,500 of the bonds and converts them after two years. The balance in the premium on bond investment is $75,000. Margarita should recognize this conversion by debiting investment in common stock for: $____

$2,575,000 (2,500 x 1,000) + 75,000

On Jan 2, 2013, Merchant Company purchases $100,000 bonds at 98. The bonds mature in five years and pay 6% interest semi-annually on June 30 and Dec 31. Merchant decides to utilize the straight-line method of amortization. On Dec 31, 2013, Merchant should debit the "discount on bond investment" account for: $____

$200

What type of disclosure would notes not traded on market exchanges have? A. Fair value B. Present value of principal and interest payments

B. Present value of principal and interest payments

On January 2, 2012, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years. The bonds were issued at face amount. On the date of the issue, Meister should recognize a liability of

$200,000 They were issued at face amount, so they are the same amount.

On Jan 2, 2015, Schneider Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest is recognized on June 30, 2015, will be equal to: $____

$3,354 95,842 x .07 x .5

Munster. Company issues $5 million face amount bonds engaging the services of an underwriter. Munster receives $4.8 million from the underwriter, who resells the bonds to individual investors for a total sum of $5.1 million. Munster Company incurred debt issue cost associated with choosing a underwriter of $________.

$300,000

On January 1, 2012, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and Dec 31. On the date of issuance, First Rate Bank should debit "notes receivable" for

$300,000 Just do face amount debit for notes receivable. The interest should be debited in interest receivable

On Jan 2, 2013, MLK Corp. issued $10 million of 8% bonds at 104. Each $1,000 bond is accompanied by 25 stock warrants. Each warrant permits the holder to purchase one share of no-par common stock for $20. Immediately after issuance, the warrants were listed on the stock exchange for $2 each. MLK should reignite equity from the sale of bonds of $_____.

$500,000 $2 x 25 x 10,000 = $500,000 (Stock listing) x (#of stock listed) x (#of bonds)

Mauser Company issues $1 million face amount, zero-coupon 10-year bonds to yield 4% interest. At the date of issue, what issue price will Mauser receive for its bonds?

$675,560 Take the future value into consideration

Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. If Mergenthal utilizes the net method, bonds payable will be credited for: $___

$749,000

On July 1, 2013, Gros Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on Jan 1 and July 1. On Dec 31, 2013, the company should debit interest expense for $____.

$7800 $195,000 x .04% Use the real price of the bonds, not the face amount. Use the effective interest rate, not the stated.

As a general rule, periodic interest is calculated by:

(Effective Interest Rate) X (Debit Outstanding) during the interest period

The times interest earned ratio is calculated by:

(Net Income + Interest + Taxes) / Interest.

The return on shareholders' equity is calculated by:

(Net Income) / (Shareholders' equity)

Debt to equity ratio =

(Total Liabilities) / (Shareholders' equity)

What are the advantages of financing with long-term debt? - A company may earn a greater return than the cost of borrowing the funds. - It is less risky than financing with equity. - Interest is tax deductible. - It decreases the current ratio.

- A company may earn a greater return than the cost of borrowing the funds. - Interest is tax deductible.

Consistent with the proposed ASU, the measurement classification for financial assets would depend on the: - assets' characteristics - maturity date of the financial instruments - market conditions for the financial instruments - company's business strategy

- assets' characteristics - company's business strategy

Which of the following amounts will be the same each year if the straight-line method of amortizing bond discounts and premiums is used? - Bond carrying value - Interest expense or revenue - Amortization

- Interest expense or revenue - Amortization

Which of the following aspects and/or strategies should decision makers consider to minimize their risk? - The chance of recurrence of gains and losses. - The existence of "off-balance-sheet" financing arrangements. - Only financial statement items are relevant to the decision maker.

- The chance of recurrence of gains and losses. - The existence of "off-balance-sheet" financing arrangements.

Nattel Corp. issues 10,000 $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by debiting:

- bonds payable for $5 million - loss on bond conversion for $1,100,000 - premium on bonds payable for $150,000

Consistent with the proposed ASU on financial instruments, the categories available for financial assets are: - fair value with changes reported in net income - amortized cost - fair value with changes reported in other comprehensive income - historical cost - present value of expected cash flows

- fair value with changes reported in net income - amortized cost - fair value with changes reported in other comprehensive income

What type of information must be disclosed related to debt? - interest rates - the names of each debt holder - aggregate amount payable for next 5 years - nature of the liability - call and conversion options

- interest rates - aggregate amount payable for next 5 years - nature of the liability - call and conversion options

Which of the following represents a correct statement regarding zero-coupon bonds? - they represent only a small portion of the bond market. - they are very common types of bonds. - they are very popular with a variety of investors. - the typical investors enjoy a tax-exempt or tax-differed status.

- they represent only a small portion of the bond market. - the typical investors enjoy a tax-exempt or tax-differed status.

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? - to use a medium of exchange in mergers and acquisitions. - to provide investors with a means for diversifying investment risk. - to sell the bonds at a higher price. - to enable smaller or debt-heavy companies to gain access to the bond market.

- to use a medium of exchange in mergers and acquisitions. - to sell the bonds at a higher price. - to enable smaller or debt-heavy companies to gain access to the bond market.

On April 1, 2013, Norman Company issues $200,000 of 6% bonds. The market rate of interest is 6%. Interest of $6,000 is payable semi-annually on June 30 and Dec 31. The indenture is dated Jan 1, 2013, and the bonds mature 5 years from that date. On the date of issue, the price of the bonds will be equal to $______.

203,000 **Most bonds these days are issued on the day they are dated in the indenture contract. On rare occasions, there may be a delay in issuing bonds that causes them to accrue interest since the day they are dated. That interest amount is added to the bonds' price. 200,000 x .06 x (3/12) = 203,000

Total Assets: $400 Total Liabilities: $220 Operating Income: $60 Income from continuing operations: $55 Net Income: $50. The company's return on shareholders' equity expressed as a percentage is:

27.78% 50/(400-220) Net Income/(Total Assets - Total Liabilities)

On Jan 2, 2013, Meister Co. called its $500,000, 8% bonds with a carrying value of $480,000. The call price is $502,000. The bonds originally were issued to yield 9%. On the call date, the company should recognize

A loss of $22,000 *The difference between the carrying amount of the debt and the reacquisition price represents either a gain or a loss on the early extinguishment of debt. When the debt is retired for less than carrying value, the debtor is in a favorable position and records a gain. The opposite occurs for a loss.

Periodic payments on installment notes typically include: A. A portion that reflects interest at the effective interest rate B. A portion that reflects interest at the stated interest rate C. Installment fees D. A portion that reduces the outstanding loan balance

A. A portion that reflects interest at the effective interest rate D. A portion that reduces the outstanding loan balance

Which of the following best describes the essence of the concept "substance over form"? A. Accounting for a transaction is primarily determined by the essence of the transaction. B. Accounting for a transaction is primarily determined by the form of the contract.

A. Accounting for a transaction is primarily determined by the essence of the transaction.

Callable bonds can be redeemed at the choice of the A. Bond issuer B. Bondholder

A. Bond issuer

Which of the following are terms that can be used to refer to the periodic interest rate paid by bond issuers? A. Coupon rate B. Stated rate C. Effective rate D. Nominal rate E. Market rate

A. Coupon rate B. Stated rate D. Nominal rate

What type of disclosure would a Bonds payable (Publicly traded bonds) have? A. Fair value B. Present value of principal and interest payments

A. Fair value

Which is true regarding the tax advantage of zero-coupon bonds? A. Interest expense is deductible without related cash flows. B. Zero-coupon bonds lead to tax refunds equal to the unamortized discount.

A. Interest expense is deductible without related cash flows.

Which of the following statements regarding the times interest earned ratio is correct? A. It indicates the margin of safety provided to creditors B. It provides assurance that the loan will be paid back at maturity.

A. It indicates the margin of safety provided to creditors

Which of the following costs are associated with issuing BOTH publicly and privately placed bonds? A. Legal fees B. SEC filling fees C. Accounting fees D. Underwriting fees

A. Legal fees C. Accounting fees ** Underwriting and SEC filing fees would be required ONLY for PUBLICLY placed bonds, but not for privately placed. So... privately placed bonds are much cheaper.

Gertrude Company receives $15,200 relating to its installment note receivable; of this amount $9,000 represents interest. In its statement of cash flows, this inflow should be reported as a(n): A. Operating activity inflow of $9,000. B. Operating activity inflow of $15,200. C. Investing activity inflow of $$15,200. D. Investing activity inflow of $6,200.

A. Operating activity inflow of $9,000. **always report interest exp and rev as an OPERATING activity. D. Investing activity inflow of $6,200. **lending is an INVESTING activity. This amount is what's left of the $15,200.

Nattel Corp. issues 10,000 $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit: A. Premium on bonds payable for $75,000 B. Bonds payable for $2,500,000 C. Loss on conversion of bonds for $75,000

A. Premium on bonds payable for $75,000 B. Bonds payable for $2,500,000

Match the issue cost for debt with U.S. GAAP: A. Recognize a separate asset for issue costs. B. Reduce the amount of debt recognized.

A. Recognize a separate asset for issue costs.

Which of the following statements are correct regarding bond yields? A. Supply and demand influence bond yields B. All bonds issued at a given point of time will yield the same return. C. Bond issues are priced to yield the market rate.

A. Supply and demand influence bond yields C. Bond issues are priced to yield the market rate.

When trying to calculate the present value of a long-term liability, what do you need to consider? A. The effective interest rate B. The stated interest rate C. Cash flows related to the obligation D. The projected effective interest rates over the life of the liability.

A. The effective interest rate B. The stated interest rate C. Cash flows related to the obligation "The present value of a liability is the present value of its related cash flows (principal and/or interest payments), discounted at the effective rate of interest at issuance."

Which of the following are cash flows typically associated with already issued bonds? A. The face amount at maturity B. Amortization of gains and losses. C. Periodic interest payments

A. The face amount at maturity C. Periodic interest payments

Match the issue cost for debt with IFRS: A. Recognize a separate asset for issue costs. B. Reduce the amount of debt recognized.

B. Reduce the amount of debt recognized.

Which of the following are correct regarding bonds? A. They obligate the issuing company to repay the bonds at a specific date. B. They obligate the issuing company to pay a specific amount. C. They obligate the issuing company to repay the bonds when interest rates increase D. They obligate the issuing company to repay the bonds when market interest rates decrease. E. They obligate the issuing company to pay an estimated amount.

A. They obligate the issuing company to repay the bonds at a specific date. B. They obligate the issuing company to pay a specific amount.

Which of the following statements regarding convertible bonds subsequent to issuance is correct?

Accounting is the same as for nonconvertible bonds.

On the date bonds are issued, bond issue costs should be recognized as _____.

Assets

Smith Company purchases new machinery by signing a $80,000 face amount, 2-year note. The market interest rate is 6%, but no interest payment is due during the life of the note. Smith should record the machinery at: A. $80,000 B. $71,200

B. $71,200

How do you determine whether the bond sells at a premium, discount, or face amount? A. Only by calculating the exact issue price and comparing it to the face amount. B. By comparing the effective and stated interest rates.

B. By comparing the effective and stated interest rates.

Which of the following is correct regarding the straight-line method of amortizing bond premiums or discounts? A. Conceptually, it is the soundest method. B. Conceptually, the method is not an alternative under U.S. GAAP. C. The method is a valid alternative under U.S. GAAP.

B. Conceptually, the method is not an alternative under U.S. GAAP.

Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In its statement of cash flows, this payment should be reported as a(n): A. Operating activity outflow of $15,200. B. Financing activity outflow of $6,200. C. Operating activity outflow of $9,000. D. Financing activity outflow of $15,200.

B. Financing activity outflow of $6,200. C. Operating activity outflow of $9,000. **Borrowing is a financing activity Paying or receiving interest is an operating activity. Lending is an investing activity

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? A. The value of the conversion feature is recognized as additional paid-in capital. B. The value of the conversion feature is not recognized separately.

B. The value of the conversion feature is not recognized separately. Because of the inseparability of their debt and equity features, the entire issue price of convertible bonds is recorded as debt, as if they are nonconvertible bonds.

Which of the following are true regarding bonds sold with detachable warrants? A. The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock. B. The warrants can be exercised separately from the bonds. C. The warrants can be sold by the bondholder to another investor.

B. The warrants can be exercised separately from the bonds. C. The warrants can be sold by the bondholder to another investor.

The mirror image of investments in bonds is

Bonds payable

Which is correct? A. Bonds sell for their face amount if they are issued near the original interest date. B. Bonds always sell for their face amount. C. Bonds may sell below, above, or at their face amount.

C. Bonds may sell below, above, or at their face amount.

Which of the following is correct regarding the effective interest method? A. Interest recorded is equal to the effective interest rate multiplied by the issue price. B. Interest paid is equal to the effective interest rate multiplied by the maturity value. C. Interest recorded is equal to the effective interest rate multiplied by the outstanding balance of the debt.

C. Interest recorded is equal to the effective interest rate multiplied by the outstanding balance of the debt.

Which of the following is correct regarding the rate of return on shareholders' equity? A. It indicates profitability earned on non financial assets. B. It indicates profitability without regard to how resources are financed. C. It indicates the effectiveness of employing resources provided by owners. D. It indicates profitability on the company's financial assets.

C. It indicates the effectiveness of employing resources provided by owners.

Peter Company issues 10-year bonds on October 1, 2015. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/15 income statement relating to this bond issue? A. Peter should recognize 6 months of interest. B. Peter should not recognize any interest until April, 1, 2016. C. Peter should recognize 3 months of interest.

C. Peter should recognize 3 months of interest.

The issue price of a bond is always equal to the A. Par or face amount of the bond. B. Sum of future cash flows. C. Present value of the future cash flows.

C. Present value of the future cash flows.

Select the statement that best explains the nature of "off-balance-sheet" financing.

Commitments that don't show up on the face of the financial statements.

____ bonds can be exchanged for shares of stock at the option of the bondholder.

Convertible

On January 1, 2012, Wormer Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years and sell for $191,684. On June 30, 2012, the company recognizes interest expense of $6,709. The company should also:

Credit discount on bonds payable for $709. This is because bonds payable is a contra-liability account, and $709 is the leftover amount, so it increases the liability and is reflected as a reduction in the discount. We credit liability accounts when we want them to increase.

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n) ______ bond.

Debenture

Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. How should he record this journal entry?

Debit cash for $749,000 Debit discount on bonds payable for $51,000 Credit bonds payable for $800,000

A company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct?

Debit cash for $749,000; Debit discount on bonds payable for $51,000; Credit bonds payable for $800,000.

When a promissory note matures and is paid, the borrower should ___ notes payable and the lender should _____ notes receivable.

Debit notes payable Credit notes receivable.

The debt equity ratio can provide information regarding a company's risk that it will be unable to pay its debt when due. This is called the company's ____ risk.

Default

Retiring any type of debt prior to its scheduled maturity date is referred as an:

Early extinguishment of debt.

The interest rate stated in a note is typically ____ to the market rate.

Equal *This is because the rate usually is negotiated at the time of the loan, so discounts and premiums are less likely for NOTES than they are for BONDS.

What describes that boards' activities on accounting for financial instruments?

FASB and IASB are working TOGETHER on this project.

Which of the following represent the typical characteristics of liabilities?

Future cash payments are certain or estimable. The requirement of future cash payments. Interest accrues as time passes.

Hatter Company's new bond issue with face amount of $7 million sells for $6.8 million. Which of the following facts may explain why the bonds sell at a discount?

Hatter Company's interest rate must be lower than that of competing companies in the bond market. **Bondholders' want bonds with a HIGH interest rate to get back more money.

An ______ interest rate is a rate that would normally apply to a particular transaction involving the exchange of an asset for a note.

Implicit

In a situation where a specific interest rate is not readily apparent, deciding what the appropriate interest rate should be is calling ____ an interest rate.

Imputing

On January 1, 2012, Wormer Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years and sell for $191,684. On June 30, 2012, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will:

Increase by $709. Interest expense is usually $6000. $709 is the leftover amount, so it increases the liability and is reflected as a reduction in the discount (a contra-liability account). Essentially, it is a discount on bonds payable.

On Dec 31, Katie Corp. receives $5120 on an installment note receivable. The outstanding loan balance on Jan 1 was $50,000; the effective interest rate is 8%. Payments are received annually. The journal entry to recognize the receipt of this payment should include credits to:

Installment Note Receivable for $1120. Interest Revenue for $4000. This is because the loan balance times the interest rate = $4000. (I got this by doing $50,000 x .08 = $4000) There is a leftover amount of $1120 on the $5120 installment note receivable she got. Credit Receivable account by $1120, because the person who paid Katie Corp. paid an extra $1120 and we want to make sure Katie isn't expecting that bit of money next Dec 31. Credit Interest Revenue for $4000 because that is what Katie has presently earned. She hasn't earned the $1120 yet.

Periodic payments on installment notes include ____ and ____.

Interest and principal. They are typically equal amount each period.*

The fundamental reason why companies issue convertible bonds is to

Make the bonds more attractive to investors (due to the conversion feature)

Use of the straight-line method for amortizing bonds discounts and premiums is justified with reference to the ___ concept.

Materiality

What size companies are most likely to issue bonds?

Mid-size companies and large companies

The return on assets is calculated by:

Net Income / Total Assets

On January 1, 2012, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and Dec 31. On Dec 31, Smite Corp. should debit _____ for $_____.

interest expense $12,000

Periodic interest expense is recognized based on the ______ interest rate and may not be equal to the amount of interest _____.

Periodic interest expense is recognized based on the EFFECTIVE interest rate and may not be equal to the amount of interest PAID.

What happens with the periodic payment when you have an installment loan

Periodic payment includes interest and a portion that reduces the outstanding loan.

A bond that sells for more than its face amount is sold at a

Premium

Generally, liabilities are valued at their ____ value.

Present

Gruenwald Corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at which value?

Present value of the cash payments using a 7% interest rate.

A company that recognizes a long-term notes payable has signed the legal document referred to as a _____ note.

Promissory note

The primary purpose of the call feature associated with bonds is to:

Protect the issuer against declining interest rates.

Which of the following are common strategies for debtors to retire bonds prior to the maturity date (early extinguishment of debt)?

Purchasing bonds on an open market. Including a call feature when the bonds are issued.

Debenture bond are secured by:

Secured only by the "full faith and credit" of the issuing corporation. No specific assets are pledged as security. This is what most corporate bonds are. More risky than a mortgage bond. In case of bankruptcy, debenture holders and other general creditors would be treated equally, UNLESS it is a subordinated debenture, which is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied.

In a private offering the bonds are sold to a(n) _____ investor.

Single

T/F IFRS is more restrictive to the choice of the fair value option for financial assets and liabilities.

TRUE

Burns Company issues bonds for their face amount of $2 million. Over the life of the bonds, the company pays a total of $3.2 million to bondolders. What can you deduce form these facts regarding the difference between the face amount and the bonds' cash flows?

The $1.2 million represents the time value of money. The bonds are issued at a discount because the present value of the cash flows is less than the face amount of the bonds.

What is correct relating to bonds that were issued two years ago with an effective interest rate that was lower than the current effective interest rate?

The bond's book value is probably not equal to their current market value.

Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Why might the bonds sell at a premium?

The company's interest rate must be higher than that of other competing companies. The market rate may only be 10%, whereas Jackie's might be a 12% stated rate, which would make her bonds more attractive.

What is the change in debt when effective interest exceeds cash paid?

The difference between the effective interest and the interest paid increases the existing liability.

What happens with the loan balance for an Installment loan?

The loan balance is reduced over time and reaches zero at the end of the loan term.

What happens with the loan balance when you have a "loan with lump sum principal payment at maturity"?

The loan balance reflects the face amount at the date of maturity.

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?

The method can only be used if it produces results that are not materially different from those produced by the effective interest method.

Bond indentures describe:

The specific promises made to bondholders

What is an advantage of issuing bonds?

The total loan is broken into many parts, making it easier to find lenders.

What legal action can be taken regarding the default of a bond issuer?

The trustee holding the indenture can sue the issuer on behalf of the bondholders.

Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy?

They receive payment only after other specific debt has been satisfied.

What is true regarding zero-coupon bonds?

Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts. THEY ARE NOT interest-free.

Because periodic payments on capital leases include both interest and a loan reduction portion, notes associated with capital leases are in essence ____ notes.

installment

On October 1, 2013, Snorkel Company issues $4 million, 8% interest bonds at face amount. Interest is payable on March 30 and Sept 30. On 12/31/13, the company's balance sheet date, Snorkel should:

accrue interest expense of $80,000. ** $4 mil x .08 x (3/12)

On Oct 1, 2013, Duner Company purchases $100,000, 8% interest newly issued bonds at face amount. Interest is payable on March 30 and Sept 30. On 12/31/13, the company's balance sheet date, Duner should

accrue interest revenue of $2000 100,000 x .08 x (3/12)

The difference between the effective interest and the interest paid represents:

amortization of a discount or premium

Consistent with the proposed ASU on financial instruments, fair value would have to be disclosed parenthetically for financial instruments accounted for using

amortized cost

Consistent with the proposed ASU, most financial liabilities would be accounted for at

amortized cost

The conversion option associated with a convertible bond is recognized separately if the conversion feature is deemed to be a _____ conversion feature.

beneficial

Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue?

creditworthiness of the issuer

A common reason for induced conversions of convertible bonds is to reduce the company's outstanding ___.

debt

Interest expense to the issuer and interest revenue to the investor are calculated each period as the ____ rate times the debt _____ during the interest period.

effective outstanding

Consistent with a pre-codification FASB Staff Position, the issue price of convertible bonds that can be settled for cash should be split into two components - liability and ___.

equity

Some accountants believe that the conversion feature associated with convertible bonds has monetary value and should be recognized as _____.

equity

Other things being equal, the ____ the debt to equity ratio, the higher the risk.

higher ** the type of risk this ratio measures is called DEFAULT risk because it presumably indicates the likelihood a company will default on its obligations.

Abby Corp. purchases a machine and signs a $20,000 note. The note requires periodic payments of 8% interest. The equipment would normally sell for $19,000 in cash. This implies that the company's implicit interest rate probably is lower/higher/equal to 8%?

higher than 8%

On January 1, 2012, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and Dec 31. On the date of issuance, First Rate Bank should debit _____ for $_____.

notes payable $300,000

Sinking fund debentures typically require that the company redeem bonds

on a pre-specified year-to-year basis.

Roger Company has "favorable financial leverage." This means that the company can earn a return on/that ___?

on borrowed funds that exceeds the cost of borrowing the funds.

Amortization of bond discounts results in the bond being valued on the balance sheet at the

present value of the associated future cash flows.

Consistent with IFRS, if the fair value of convertible bonds for which no active market exists cannot be determined, the value of the bonds can be calculated based on the

present value of the bonds' cash flows using the market interest rate.

Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the:

present value of the future cash flows using original rates.

What does a return on assets indicate?

profitability without regard to how resources are financed.

Over time, the carrying value of bonds issued at a premium decreases because the premium is ____.

reduced **Since more cash is paid each period than the effective interest, the debt outstanding is reduced by the overpayment. As the premium is reduced by amortization, the carrying value of the bonds declines toward face value. This is because the effective interest each period is less than the cash interest paid. ** This is precisely the opposite of when debt is sold at a discount, when the effective interest each period is more than the cash paid. As the discount is reduced by amortization, the carrying value of the bonds increases toward face value.

Consistent with IFRS, on the date the bonds are issued, bond issue costs are recognized by

reducing the amount of the recorded amount of the debt.

Instead of selling bonds to individual investors, bond issuers typically engage an ____ to sell the bonds.

underwriter