ACTG SB CH14
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n)
debenture bond
The amount of interest paid on bonds is calculated by multiplying ______ of the bonds with the ____ rate.
face amount; stated
Bonds that do not include a call provision
may be repurchased on the open market
Generally, liabilities are valued at their
present value
The issue price of a bond is always equal to the
present value of future cash flows
When we multiply the face amount of bonds with the stated interest rate, we calculate
the amount of interest paid
Which of the following correctly describes a bond indenture?
A document detailing the promises made by the bond issuer.
Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.)
Appointed by bond issuer Holds the bond indenture Represents the rights of the bond holders
Which of the following represent the typical characteristics of liabilities? (Select all that apply.)
Future cash payments are certain or estimable. Interest accrues as time passes on long-term liabilities. The requirement of future cash payments.
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 stated interest rate must be lower than that of competing companies in the bond market.
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.)
Including a call feature when the bonds are issued. Purchasing bonds on an open market.
Which of the following is correct regarding the effective interest method?
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture?
It is impractical for the issuer to enter into an agreement with each bondholder.
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit of the issuer.
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.
Periodic interest is incurred
On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for?
Reduce the cash proceeds and increase the discount and debt issue costs account
Which of the following is correct 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 are correct regarding bonds? (Select all that apply.)
They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at:
a discount
A bond feature that aims at making the bonds more attractive to investors is the ____ feature.
conversion
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ________ bonds.
conversion
On January 1, 20X1, Wormer Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. The company should also
credit discount on bonds payable for $709.
Accounting for convertible bonds subsequent to issuance is the same as accounting for _____.
non-convertible bonds
Bond issue costs
reduce the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing.
Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.)
To use a medium of exchange in mergers and acquisitions. To enable smaller or debt-heavy companies to gain access to the bond market. To sell the bonds at a higher price.
Mitchell's investment in convertible bonds has a net book value of $1.4 million when Mitchell converts the bonds to common stock. The fair value of the common stock is $1.5 million. Mitchell should recognize its investment in common stock at
$1.4 million
On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars).
$115,589
On April 1, Magenta Company sells $500,000 face amount, 10% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is 9%. When the bonds are issued, how much interest will be included in the issue price?
$12,500
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 2 years. At that time, 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
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 recognize this conversion by crediting common stock for
$2,575,000
On January 1, 2018, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and December 31. The bonds mature in 5 years. The bonds were issued at face amount. On the date of issue, Meister should recognize a liability of
$200,000.
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$217,966
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest recognized on June 30, 20X1, will be equal to (round to the nearest full dollar)
$3,354.
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of
$354.
During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was:
$400
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are sold, Early will receive cash in amount of
$520,000.
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $191,684 with an effective interest rate of 7%. Effective interest recognized on June 30, 20X1, will be equal to (round to whole dollars)
$6,709.
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market interest rate is 7%. The bond issues for $191,684. On June 30, the company should recognize a discount amortization of
$709.
On April 1, Munchin Company sells $800,000 face amount, 6% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 6%. When the bonds are sold, Munchin should receive:
$812,000
Which of the following statements regarding convertible bonds subsequent to issuance is correct?
Accounting is the same as for nonconvertible bonds.
Mergenthal 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.
Peter Company issues 10-year bonds on October 1, 20X1. 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/X1 income statement relating to this bond issue?
Peter should recognize 3 months of interest.
Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium?
The company's stated interest rate must be higher than that of other competing companies.
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.
Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond?
The value of the conversion feature is not recognized separately.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.)
The warrants can be exercised separately from the bonds. The warrants can be sold by the bondholder to another investor.
Which of the following represents an important difference between bonds with detachable warrants and convertible bonds?
The warrants can be separated from the bonds.
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
Which of the following are true regarding zero-coupon bonds? (Select all that apply.)
Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.
When an accounting period ends between interest dates, interest should be
accrued since the last interest date
On July 1, 20X1, Klein 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 January 1 and July 1. On December 31, 20X1, the company should credit
bond discount for $800.
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 (Select all that apply.)
bonds payable for $2,500,000. premium on bonds payable for $75,000.
Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should
credit premium on bonds payable for $10,000.
A bond that sells for less than its face amount is sold at a
discount
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the __________ __________method. (Enter only one word per blank.)
effective interest
The specific promises made to bondholders are described in a document called a bond _____. (Enter only one word.)
indenture
The specific promises made to bondholders are described in a document referred to as a bond
indenture.
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are issued, Early will credit (Select all that apply.)
interest payable for $20,000. bonds payable for $500,000.
The fundamental reason why companies issue convertible bonds is to
make the bonds more attractive to investors.
The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to
mislead investors.
Using the effective interest method, the bond issuer calculates interest expense based on the:
outstanding balance of the bonds
Zero-coupon bonds typically issue at a deep discount because they
pay no interest
If bonds sell between interest periods, the amount received by the bond issuer includes the bonds selling price
plus accrued interest.
A bond that sells for more than its face amount is sold at a.
premium
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to
repay a certain amount at a specific date.
An early extinguishment of debt refers to long-term liability such as bonds that are
retired prior to maturity
Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as
subordinate
Which of the following are cash flows typically associated with already issued bonds? (Select all that apply.)
the face amount at maturity periodic interest payments
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as __________ coupon bonds.
zero