Ch 9 (2)

Issuing bonds at a premium is more common than at a discount. True or false?

False

To accrue interest for a partial-period, you simply use the interest expense amount from the amortization table that you created. True or false?

False

For almost all companies, income tax expense and income tax payable differ. True or false?

True

The ability to work back and forth between the financial statements and the related notes is an important part of financial analysis. True or false?

True

Stated interest rate

the interest rate printed on the bond certificate, also called the coupon rate.

Market interest rate

the rate that investors demand for loaning their money, also called the effective-interest rate.

Present value

today's value of a future payment or series of future payments, assuming that those payments include interest.

Corporate bonds that can be converted into the issuing company's stock are called ________ or _________.

convertible bonds convertible notes

The _________________ method is the most theoretically correct method of amortizing bond discount and premium because it recognizes the impact that the _______________________ has on interest expense recognized each interest payment period.

effective-interest time value of money

Also known as the _________, the leverage ratio shows a company's average ___________ per dollar of average _____________.

equity multiplier total assets common stockholders' equity

When bonds are issued at a discount, the discount is allocated to ___________ through amortization over the term of the bonds.

interest expense

The new FASB standard for measuring and reporting leases requires both finance and operating leases that are longer than ________ to be placed on the balance sheet.

12 months

What does a high times-interest earned ratio indicate?

A high times-interest-earned ratio indicates it is easy for a company to pay interest expense with operating income.

___________ are groups of debt securities issued to multiple lenders, called bondholders.

Bonds payable

What type of bond may the issuer may pay off at a prearranged price whenever the issuer chooses?

Callable

Which account would a company debit if it issued bonds payable at a discount?

Cash & Discount on Bonds Payable

What journal entry would a company make if it issued $100,000 worth of bonds payable at par?

Cash 100,000 ------- Bonds Payable ------100,000

What is the journal entry to record the issuance of bonds at a premium?

Cash XXX Bonds Payable XXX Premium on Bonds Payable XXX

What are commitments?

Commitments are contractual promises to make transactions in the future that create financial obligations for a company.

Through amortization, does the premium increase or decrease interest expense each period over the term of the bonds?

The premium decreases interest expense each period

Discount on Bonds Payable is a contra account to Bonds Payable. True or false?

True

Capitalizing a lease means to __________.

put the lease on the company's balance sheet

Capitalizing a lease will increase a company's ROA and decrease a company's debt ratio. True or false?

False

Which of the following bonds are backed only by the borrower's promise to pay?

Debentures

The journal entry to pay interest expense and to amortize a bond discount would include which of the following?

Debit to Interest Expense

The entry to record the payment of interest expense and to amortize a bond premium would include which of the following?

Debit to Premium on Bonds Payable

What is the equation to calculate the leverage ratio?

Leverage ratio = Average total assets / Average common stockholders' equity

Is having two sets of records and rules, one for financial reporting and the other for reporting taxes, illegal?

No, having two sets of records and rules is not illegal; in fact, it is a legal requirement.

What is the main reason a company would retire bonds early?

The main reason for retiring bonds early is to relieve the pressure of making high interest payments.

How is the times-interest-earned ratio calculated?

To calculate this ratio, divide a company's operating income by its interest expense.

A lease that transfers ownership of the asset to the lessee by the end of the lease term considered a finance lease. True or false?

True

U.S. GAAP encourages companies to report the ____________________ of their long-term debt.

fair value

A bond issued at a price above its face value is said to be issued at a ___________, and a bond issued at a price below face value has a __________________.

premium discount

1As a premium is amortized, it ____________________ the amount of interest expense recognized each period because the issuing price was greater than the ____________ of the bonds

reduces face value

The ___________ method divides a bond discount into equal amounts over the bond's term, resulting in the same amount of interest expense for each interest period.

straight-line amortization