ACCT ch 9
Non-Interest Bearing Debt
- Account payable - Employee salary payable - Tax payable - Dividend payable - Unearned revenue
Bonds that are backed only by the credit of the issuing company are: A. collateral bonds. B. term bonds. C. debenture bonds D. callable bonds.
C
Bonds that mature all at the same time are: A. callable bonds. B. secured bonds. C. term bonds. D. serial bonds.
C
Liability
Creditors: 1. Non-Interest bearing debt 2. Interest bearing debt
A bond with a face value of $350,000 and a quoted price of 92 has a selling price of: A. $350,000 B. $380,435 C. $350,092 D. $322,000
D
Par Value
Is a per share amount appearing on stock certificates. It is also an amount that appears on bond certificates. In the case of common stock the par value per share is usually a very small amount Example: Typecast Corporation issued 5% bonds when the market interest rate was 5%
Interest Bearing Debt
- Bank loans/borrowing - Corporate bond
The present value of $11,000 at the end of nine years at 7% interest is: A. $10,228. B. $71,665. C. $11,000. D. $5,984.
D
If bonds are issued at a discount and the effective-interest method is used, the amount of interest expense: A. increases each period as the bonds approach maturity. B. decreases each period as the bonds approach maturity. C. is less than the cash interest payment. D. remains the same over the term of the bonds.
A
McKeith Corporation issued $150,000 of 12%, 20-year bonds payable on January 1, 2019. The market interest rate when the bonds were issued was 13%. Interest is paid semiannually on January 1 and July 1. The first interest payment is July 1, 2019. Using the effective-interest amortization method, how much interest expense will McKeith record on July 1, 2019? A. $9,060 B. $8,363 C. $9,000 D. $9,750 E. $60
A
You are calculating the present value of $5,000 that you will receive at the end of every year for the next ten years. Which table will you use to obtain the present value factor to calculate the total present value of those $5,000 payments you will be receiving? A. Present Value of Ordinary Annuity of $1 B. Future Value of Ordinary Annuity of $1 C. Future Value of $1 table D. Present Value of $1 table
A
McDonaugh Corporation issued $250,000 of 5%, 10-year bonds payable on January 1, 2019. The market interest rate when the bonds were issued was 8%. Interest is paid semiannually on January 1 and July 1. The first interest payment is July 1, 2019. Using the effective-interest amortization method, how much interest expense will McDonaugh record on July 1, 2019? A. $4,976 B. $7,961 C.$1,711 D. $10,000 E. $6,250
B
Tamiko Corporation retires its bonds at 104 on January 1, after the payment of interest. The face value of the bonds is $850,000. The carrying value of the bonds at retirement is $875,500. The entry to record the retirement will include a: A. credit of $25,500 to Premium on Bonds Payable. B. debit of $25,500 to Premium on Bonds Payable. C. credit of $8,500 to Premium on Bonds Payable. D. debit of $8,500 to Premium on Bonds Payable.
B
What is the present value of bonds with a face value of $8,000, a stated interest rate of 5%, a market rate of 7%, and a maturity date two years in the future? Interest is paid semiannually. A. $6,990 B. $7,706 C. $8,436 D. $8,000
B
Which of the following is not needed to compute the present value of an investment? A. The amount of the receipt B. The rate of inflation C. The interest rate D. The length of time between the investment and future receipt
B
Woodward Corporation issued $150,000, 12%, ten-year bonds on January 1, 2019, for $168,693 when the market interest rate was 10%. Interest is paid semiannually on January 1 and July 1. The corporation uses the effective-interest method to amortize bond discounts and premiums. The total amount of bond interest expense recognized on July 1, 2019, would be closest to: A. $7,500. B. $8,435. C. $9,000. D. $18,000.
B
Types of Corporate Bond
Bonds issues at face value/at par value: Coupon rate = market interest rate Bonds issued at discount: coupon rate < market interest rate Bonds issued at premium: coupon rate > market interest rate
Edward Financing leases airplanes to airline companies. Edward has just signed a 5-year lease agreement that requires annual year-end lease payments of $1,600,000. What is the present value of the lease using a 10% interest rate? A. $60,656,000 B. $9,936,000 C. $6,065,600 D. $993,600
C
Kaiser Company issued $650,000, 7%, five-year bonds for 105, with interest paid annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year? A. $682,500 B. $679,250 C. $676,000 D. $689,000
C
Mission Furniture issued $500,000 in bonds payable at par. The journal entry to record a semiannual interest payment on these bonds would A. debit Interest Expense and credit Bonds Payable. B. debit Cash and credit Interest Expense. C. debit Interest Expense and credit Cash. D. debit Cash and credit Interest Payable
C
What type of account is Discount on Bonds Payable and what is its normal balance?
Contra liability; Debit
A bond with a face amount of $12,000 has a current price quote of 103.85. What is the bond's price? A. $1,246.20 B. $124,620 C. $12,103.85 D. $12,462.00
D
The Discount on Bonds Payable account: A. is a miscellaneous revenue account. B. is an expense account. C. is expensed at the bond's maturity. D. is a contra account to Bonds Payable.
D
The carrying value of Bonds Payable equals: A. Bonds Payable plus Accrued Interest. B. Bonds Payable minus Premium on Bonds Payable. C. Bonds Payable plus Discount on Bonds Payable. D. Bonds Payable minus Discount on Bonds Payable.
D
The discount on a bond payable becomes: A. additional interest expense in the year the bonds are sold. B. a reduction of interest expense in the year the bonds mature. C. a reduction in interest expense over the life of the bonds. D. additional interest expense over the life of the bonds.
D
What type of account is Discount on Bonds Payable and what is its normal balance? A. Adjusting account; Credit B. Reversing account; Debit C. Contra liability; Credit D. Contra liability; Debit
D
Discount
Referred to as a contra revenue account. Hence, its debit balance will be one of the deductions from sales (gross sales) in order to report the amount of net sales Example: Eugene Company issued bonds payable that pay stated interest of 6 1/4%. At issuance, the market DoubleTyme, Inc., issued 3% bonds payable when the market rate was 3 3/4%
T/F: When the year-end accrual of interest and amortization of discount is recorded, the carrying value of Bonds Payable on the balance sheet will increase.
True, as the balance in the discount account decreases (as it is amortized), the carrying value of the bonds increases.
Bonds payable retirement
Two situations: 1. Bond retirement at maturity: debit bond, credit cash 2. bond retirement before maturity: can result in gain/loss
Two methods to calculate interest expense for discount bond and premium bond
1. Effective interest rate method 2. Straight line amortization method
Amortizing the discount on bonds payable: A. reduces the carrying value of the bond liability. B. increases the recorded amount of interest expense. C. is necessary only if the bonds were issued at more than face value. D. reduces the semiannual cash payment for interest.
B
Bonds from the same bond issue that mature at different times are called: A. unsecured bonds. B. serial bonds. C. convertible bonds. D. term bonds.
B
Bonds with an 8% stated interest rate were issued when the market rate of interest was 5%. This bond was issued at: A. par value. B. a premium. C. a discount. D. face value.
B
Ellison Corporation issued $300,000, 8%, five-year bonds on January 1, 2019, for $325,591 when the market interest rate was 6%. Interest is paid semiannually on January 1 and July 1. The corporation uses the effective-interest method to amortize bond discounts and premiums. The total amount of bond interest expense recognized on July 1, 2019, would be closest to: A. $9,000. B. $9,768. C. $12,000. D. $24,000.
B
McDonaugh Corporation issued $250,000 of 5%, 10-year bonds payable on January 1, 2019. The market interest rate when the bonds were issued was 8%. Interest is paid semiannually on January 1 and July 1. The first interest payment is July 1, 2019. McDonaugh recorded interest expense of $7,961 using the effective-interest amortization method. Mcdonaugh's entry to record the interest expense on July 1, 2019, will include a: A. debit to Premium on Bonds Payable. B. credit to Discount on Bonds Payable. C. debit to Bonds Payable. D. credit to Interest Expense.
B
You are calculating the present value of $1,000 that you will receive five years from now. Which table will you use to obtain the present value factor to calculate the present value of that $1,000? A. Present Value of Ordinary Annuity of $1 B. Present Value of $1 table C. Future Value of $1 table D. Future Value of Ordinary Annuity of $1
B
The carrying value of Bonds Payable equals
Bonds payable - Discount on bonds payable
Bonds that are backed by collateral are: A. convertible bonds. B. unsecured bonds. C. callable bonds. D. secured bonds.
D
Bonds that can be exchanged for stock are called: A. debenture bonds. B. serial bonds. C. callable bonds. D. convertible bonds.
D
McDonaugh Corporation issued $250,000 of 5%, 10-year bonds payable on January 1, 2019. The market interest rate when the bonds were issued was 8%. Interest is paid semiannually on January 1 and July 1. The first interest payment is July 1, 2019. McDonaugh recorded interest expense of $7,961 using the effective-interest amortization method. McDonaugh's entry to record the interest expense on July 1, 2019, will include a: A. debit to Bonds Payable. B. debit to Premium on Bonds Payable. C. credit to Interest Expense. D. credit to Discount on Bonds Payable
D
On January 1, 2020, Slane Corporation issued $1,000,000, 8%, 10-year bonds. The bond interest is payable on January 1 and July 1. The bonds sold for $1,148,775. The market rate of interest when the bonds were issued was 6%. Under the effective-interest method, the interest expense for the six months ending July 1, 2020, would be closest to: A. $80,000. B. $30,000. C. $40,000. D. $34,463.
D
Pollard Corporation issued $2,300,000, 10-year, 7% bonds for $2,070,000 on January 1, 2019. Interest is paid semiannually on January 1 and July 1. The corporation uses the straight-line method of amortization. Pollard's fiscal year ends on December 31. The amount of discount amortization on July 1, 2019, would be: A. $161,000 B. $230,000 C. $23,000 D. $11,500
D
The carrying value on bonds equals Bonds Payable: A. minus Premium on Bonds Payable. B. plus Discount on Bonds Payable. C. plus Premium on Bonds Payable. D. minus Discount on Bonds Payable. E. both a and b. F. both c and d.
F
T/F: When a bond is sold at a discount, the cash received is less than the present value of the future cash flows from the bond, based on the market rate of interest on the date of issue.
False, the cash received is equal to the present value of the future cash flows
T/F: When a bond is issued at a discount, the semiannual cash interest payments are calculated using the market rate on the date of issue.
False, the contract (stated) rate, not the market rate, is always used to calculate the cash interest payment
The Discount on Bonds Payable account
Is a contra account to bonds payable
Dupont Analysis
It prevents accounting information users both internal and external from fitting on profit along. It encourages accounting information users to evaluate company performance from various angles
Asset use efficiency
Measured by asset turnover (sales revenue/avg. total assets)
Solvency
Measured by financial leverage (avg. total assets/avg. shareholders' equity)
Profitability
Measured by profit margin (net income/sales revenue)
Premium
Occurs when bonds payable are issued for an amount greater than their face or maturity amount Example: The market interest rate is 4%. Raintree Corp. issues bonds payable with a stated rate of 5 1/2%.
T/F: When a bond is issued at a discount, the semiannual amount of interest expense will be greater than the cash payment for interest.
True, because interest expense includes both cash interest and amortization of the discount.
Bond carrying value equals Bonds Payable
minus Discount on Bonds payable plus Premium on bonds payable
Bonds payable minus the Discount on bonds payable yields the: A. carrying amount. B. maturity value. C. annual interest D. principle amount.
A
Bonds that may be retired at a prearranged price are called: A. callable bonds. B. term bonds. C. secured bonds. D. convertible bonds.
A
If bonds are issued at a discount and the effective-interest method is used, the amount of interest expense: A. increases each period as the bonds approach maturity. B. remains the same over the term of the bonds. C. decreases each period as the bonds approach maturity. D. is less than the cash interest payment.
A
A technique to disaggregate the return on equity into 3 components
1. Profitability 2. Asset use efficiency 3. Solvency
On January 1, 2020, Fergus Corporation issued $800,000, 10%, 5-year bonds. The bond interest is payable on January 1 and July 1. The bonds sold for $864,887. The market rate of interest when the bonds were issued was 8%. Under the effective-interest method, the interest expense for the six months ending July 1, 2020, would be closest to: A. $34,595. B. $40,000. C. $80,000. D. $32,000.
A
The journal entry on the maturity date to record the retirement of bonds with a face value of $1,000,000 that were issued at a $60,000 discount includes: A. a debit to Bonds Payable for $ 1,000,000. B. a credit to Cash for $1,060,000. C. a debit to Discount on Bonds Payable for $60,000. D. all of the above.
A
On January 1, 2020, Clare Corporation issued $600,000, 8%, 10-year bonds. The bond interest is payable on January 1 and July 1. The bonds sold for $689,264. The market rate of interest when the bonds were issued was 6%. Under the effective-interest method, the interest expense for the six months ending July 1, 2020, would be closest to: A. $18,000. B. $20,678. C. $48,000. D. $24,000.
B
You have received a settlement offer from an automobile manufacturer due to mechanical problems with your automobile. The manufacturer will pay you $18,000 in one lump sum nine years from now. You can earn 10% on your investments. The present value of the manufacturer's settlement offer is closest to: A. $18,000 B. $7,632 C. $16,200 D. $42,443
B
Spring Company sells $500,000 of 6%, 20-year bonds for 69.1566 on April 1, 2018. The market rate of interest on that day is 9.5%. Interest is paid each year on April 1. The entry to record the sale of the bonds on April 1 would be as follows: A. Cash 345,783 Bonds Payable (345,783) B. Cash 500,000 Discount on Bonds Payable (154,217) Bonds Payable (345,783) C. Cash 345,783 Discount on Bonds Payable 154,217 Bonds Payable (500,000) D. Cash 500,000 Bonds Payable (500,000)
C
Sunrise Company sells $450,000 of 4%, 20-year bonds for 57.4149 on April 1, 2018. The market rate of interest on that day is 8.5%. Interest is paid each year on April 1. The issue price of the bond is $258,367. Sunrise Company uses the straight-line amortization method. The amount of interest expense for each year will be: A. $18,000. B. $47,832. C. $27,582. D. $22,454. E. none of these.
C
When the effective-interest method is used, the amount of bond discount amortized each interest period is equal to the: A. amount of interest expense plus the cash paid for interest. B. face value of the bond times the stated interest rate. C. amount of interest expense less the cash paid for interest. D. face value of the bond times the market interest rate at the date of issue.
C
When the effective-interest method is used, the amount of bond discount amortized each interest period is equal to the: A. face value of the bond times the stated interest rate. B. amount of interest expense plus the cash paid for interest. C. amount of interest expense less the cash paid for interest. D. face value of the bond times the market interest rate at the date of issue.
C
Woodward Corporation issued $500,000, 8%, ten-year bonds on January 1, 2019, for $770,683 when the market interest rate was 2%. Interest is paid semiannually on January 1 and July 1. The corporation uses the effective-interest method to amortize bond discounts and premiums. The total amount of bond interest expense recognized on July 1, 2019, would be closest to: A. $20,000. B. $40,000. C. $7,707. D. $5,000.
C
You have won $1,300,000 in a lottery. Your winnings will be paid to you in equal annual year-end installments of $65,000 over 20 years. You estimate that you can earn 8% on your investments. The present value of your $1,300,000 winnings would be closest to: A. $1,300,000 B. $661,830 C. $638,170 D. $1,365,000
C
McDonaugh Corporation issued $250,000 of 5%, 10-year bonds payable on January 1, 2019. The market interest rate when the bonds were issued was 8%. Interest is paid semiannually on January 1 and July 1. The first interest payment is July 1, 2019. McDonaugh recorded interest expense of $7,961 using the effective-interest amortization method. McDonaugh's entry to record the interest expense on July 1, 2019, will include a: A. debit to Premium on Bonds Payable. B. debit to Bonds Payable. C. credit to Interest Expense. D. credit to Discount on Bonds Payable.
D
McDurney Corporation issued $100,000 of 4%, 15-year bonds payable on January 1, 2019. The market interest rate when the bonds were issued was 6%. Interest is paid semiannually on January 1 and July 1. The first interest payment is July 1, 2019. Using the effective-interest amortization method, how much interest expense will McDurney record on July 1, 2019? A. $1,608 B. $412 C. $3,000 D. $2,412 E. $2,000
D
T/F: When a bond is sold at a discount, the maturity value is less than the present value of the principal and interest payments, based on the market rate of interest on the date of issue.
False, the maturity value is greater than the present value of future cash flows, which is why the bond was issued at a discount.
T/F: The amortization of the discount on a bond payable results in additional interest expense recorded over the life of the bond
True, the discount is amortized to interest expense over the life of the bond, the discount is actually additional interest expense that has to be paid because the bond's contract rate was less than the market rate on the bond issue date.