ch 14

Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster elected the fair value option classified the bonds as held to maturity issued premium bonds issued discounted bonds

elected the fair value option

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 improve net income. reduce reporting costs. be easier to apply. mislead investors.

mislead investors.

Which of the following correctly describes a bond indenture? A document detailing the promises made by the bond issuer. The portfolio of bonds that are issued during a particular fiscal period. The relationship between the effective interest and the stated interest rates.

A document detailing the promises made by the bond issuer.

Volk Company selected the fair value option for its outstanding bonds. During the current year, the company recognized a holding gain relating to the bonds in income. The holding gain is a result of the value of the bonds decreasing remaining constant increasing

decreasing

The debt to 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

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.

effective interest

Common methods used by bond issuers to induce bond holders to convert their bonds to common stock are (Select all that apply.) additional cash promises of additional dividends discounts on bonds payable stock warrants favorable conversion ratios

additional cash stock warrants favorable conversion ratios

Bonds that pay no interest and instead issue at a deep discount are commonly referred to as _____ coupon bonds.

0

Neumann Corp. compares three different investment opportunities. Opportunity A has $1 million in debt and $2 million in equity; Opportunity B, $1.5 million in debt and $2 million in equity; Opportunity C, $1 million in debt and $2.5 million in equity. If the companies are equal in all other aspects, which of the companies tends to have the lowest investment risk? Company B Company C Company A

Company C

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) Factoring bonds through a licensed factor. Including a call feature when the bonds are issued. Purchasing bonds on an open market.

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

Which of the following is true regarding a debenture bond? It is secured by the issuer's long-term assets. It is secured by the faith and credit of the issuer. It is secured by an outside third party.

It is secured by the faith and credit of the issuer.

Premiums Discount

Premiums: A bond that sells for more than its face amount Discount: A bond that sells for less than its face amount

The interest rate stated in a note is typically equal to the market rate. True False

True

Which of the following is a common factor that affects the fair value of a company's bonds? changes in the stock fair value of the company's common stock changes in global currency rates changes in current market rates

changes in current market rates

The specific promises made to bondholders are described in a document called a bond _____

indenture

The return on shareholders' equity is calculated by dividing _____ _____ by total shareholders' equity.

net income

The return on assets is calculated by dividing _____ _____ by total assets.

net income

Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit cash notes payable accounts payable bonds payable

notes payable

Schulz Company borrows cash from a bank and signs a promissory note. The bank should record accounts receivable notes receivable notes payable accounts payable

notes receivable

In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n) operating activity. financing activity. investing activity.

operating activity.

In the statement of cash flows, interest received on long-term notes receivable should be reported as inflows from a(n) financing activity. investing activity. operating activity.

operating activity.

What is the primary reason why the issue price of a bond differs from the cash flows associated with the bond subsequent to its issuance? The difference represents a discount. The difference represents a premium. The difference represents the time value of money.

The difference represents the time value of money.

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

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 $10,300,000 $2,500,000 $2,575,000

$2,575,000 (10,000 x 1,000 + 300,000) x 25%

On January 1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds of $212,000. $260,000. $200,000.

$200,000.

On January 1, 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 $260,000. $200,000. $212,000.

$200,000.

On January 1, 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). $215,567 $217,966 $200,000 $183,777

$217,966 (200,000 x 0.82035) + (6,000 x 8.98259)

The following selected information pertains to Wilson Company. 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 33.33%. 12.50%. 27.78%. 13.75%.

27.78%. 50/(400 - 220)

Which of the following represent the typical characteristics of liabilities? (Select all that apply.) Future cash payments cannot be measured. Interest accrues as time passes on long-term liabilities. Future cash payments are certain or estimable. The requirement of future cash payments.

Interest accrues as time passes on long-term liabilities. Future cash payments are certain or estimable. The requirement of future cash payments.

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. Peter should recognize 6 months of interest. Peter should not recognize any interest until April 1, 20X2.

Peter should recognize 3 months of interest.

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 bondholders. What can you deduce from these facts regarding the difference between the face amount and the bonds' cash flows? The $1.2 million represents a discount. The $1.2 million represents a premium. The $1.2 million represents the time value of money.

The $1.2 million represents the time value of money.

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums? The method can be used if a company irrevocably elects the method on the bond issue date. The method is not permitted under current U.S. GAAP. The method can only be used if it produces results that are not materially different from those produced by the effective interest method.

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 are true regarding zero-coupon bonds? (Select all that apply.) Zero-coupon bonds are interest free. Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.

Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.

Periodic payments on installment notes typically include a portion that reflects interest at the stated interest rate. a portion that reduces the outstanding loan balance. installment fees. a portion that reflects interest at the effective interest rate.

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

Grunwald elected to report its bonds at fair value. During the current year the fair value of the bonds increased due to changes in the related credit risk. Grunwald should report the gain as part of OCI by disclosing it in the financial statement notes as a reduction in interest expense as part of net income

as part of OCI

Which of the following purchases frequently involve installment notes payable? (Select all that apply.) automobiles buildings supplies land utilities

automobiles buildings land

The specific promises made to bondholders are described in a document referred to as a bond indenture. option contract. debenture. warrant.

indenture.

The interest rate on notes payable typically is equal to the ______ rate. market short-term borrowing credit prime

market

Changes in the current ______ often represent a major contributor to changes in the fair value of bonds. coupon interest rate market interest rate stated interest rate

market interest rate

Zero-coupon bonds typically issue at a deep discount because they are high risk bonds offer a low interest rate pay no interest offer a high interest rate

pay no interest

Zero-coupon bonds typically issue at a deep discount because they pay no interest offer a high interest rate are high risk bonds offer a low interest rate

pay no interest

Jones Company wants to improve its debt equity ratio and offers holders of convertible bonds additional consideration for converting their bonds to common stock. During 20X1, the company paid $500,000 for such consideration. This amount should be capitalized and amortized over the life of the remaining bonds. recognized as an expense when paid. deducted from paid-in capital.

recognized as an expense when paid.

Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the maturity amount of the note. value of the purchased equipment. interest rate stated in the note.

value of the purchased equipment.

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). $100,000 $107,000 $115,589 $81,307

$115,589 (100,000 x 0.61027) + (3,500 x 15.58916)

On January 1, 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 year 1, the company should recognize a discount amortization of $709 $0. $354. $125.

$354. (95,842 x 0.035) - 3,000

On January 1, 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 year 1, the company should recognize a discount amortization of $0. $249. $709. $1,418

$709. (191,684 x 0.035) - 6,000 7% x 6/12 = .035

The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is 1.27. 1.47. 1.32. 0.79.

1.32. ($100 + $150)/($120 + $50 + $20)

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is 12.5%. 15%. 13.75%.

12.5%. $50/$400 = 12.5%

Holding gains resulting from decreases in the fair value of debt indicate that the company's debt has become less risky. True False

False

If a company elects the fair value option, it must report all of its financial instruments at fair value. True False

False

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

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

Which of the following statements regarding the fair value option is correct? It can be applied on an "instrument-by-instrument" basis. It must be applied to all or none of the financial assets and liabilities. It must be applied to all financial instruments in the same category.

It can be applied on an "instrument-by-instrument" basis.

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 principal payments must be made Periodic interest must be paid Periodic interest is incurred

Periodic interest is incurred

On January 1, 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 Increase the cash proceeds and increase the discount and debt issue costs account Reduce the cash proceeds and increase the bonds payable account

Reduce the cash proceeds and increase the discount and debt issue costs account

When an accounting period ends between interest dates, interest should be accrued since the last interest date prepaid ignored until the next interest payment date

accrued since the last interest date

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds? The warrants can be separated from the bonds. Bonds with detachable warrants typically sell for less than convertible bonds. The warrants give the holder the option to purchase additional bonds at a favorable price.

The warrants can be separated from the bonds.

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

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

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

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

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. loss on conversion of bonds for $75,000.

bonds payable for $2,500,000. premium on bonds payable for $75,000.

Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ______ bonds.

convertible or conversion

A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n) serial bond debenture bond secured bond indenture bond

debenture bond

Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the debt yield ratio. debt ratio. equity yield ratio. debt to equity ratio.

debt to equity ratio.

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

discount

Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In Kordel's statement of cash flows, this payment should be reported as (Select all that apply.) financing activity outflow of $15,200. financing activity outflow of $6,200. operating activity outflow of $9,000. operating activity outflow of $15,200.

financing activity outflow of $6,200. operating activity outflow of $9,000.

Debt issue costs do not affect the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing. increase the cash proceeds from the issuance of debt. decrease the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.

increase the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.

Bonds that do not include a call provision cannot be retired prior to the maturity date must be outstanding until maturity may be repurchased on the open market

may be repurchased on the open market

Generally, liabilities are valued at their nominal amount. net realizable value. fair market value. present value.

present value.

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

promissory

The primary purpose of the call feature associated with bonds is to allow investors to regain control over their invested funds. protect the issuer against declining interest rates. exchange the bonds for another type of financing source.

protect the issuer against declining interest rates.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to reacquire the bonds when interest rates fall. repay a certain amount at a date to be determined in the future. pay interest if the company is profitable. repay a certain amount at a specific date. reacquire the bonds when interest rates rise.

repay a certain amount at a specific date.

Installment notes typically involve the purchase of assets and (Select all that apply.) require installment payments over time. require periodic payments of interest and payment of the loan at maturity. periodic payments include principal and interest. defer interest payments until maturity.

require installment payments over time. periodic payments include principal and interest.

An early extinguishment of debt refers to long-term liability such as bonds that are retired prior to maturity refinanced at maturity converted to common stock

retired prior to maturity

If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the: value of the asset or service exchanged return on the company's debt return on the company's equity interest rate stated on the note

value of the asset or service exchanged