ch 9

Given the information below, which bond(s) will be issued at a discount? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of Return 5% 10% 12% 7% Market Rate of Return 7% 9% 12% 8%

bonds 1,4

the term used for bonds that are unsecured as to principle is

debenture bods

If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be

disclosed and reported as a liability

The entry to record a monthly payment on an installment note

increase expense, decrease liabilities, and decrease assets

Ford estimates engine warranty expense in the year a car is sold. This best follows which of the following accounting principles?

matching

the bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:

more than 500,000

which of the following is true for bonds issued at a discount

the market interest rate is greater than the stated interest rate

the price of a bond is equal to

the present value of the face amount plus the present value of the stated interest payments

a bondholder that owns a 10,000, 6%, 25-year bond has

the right to receive 10,000at maturity

(T/F) a premium occurs when the issue price of a bond is above its face amount

true

(T/F)A debt to equity ratio of 1.0 means that half of the company's assets are financed by creditors.

true

A corporation obtains a $125,000, 6%, five‐year loan for equipment on January 1, 2018. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2018

1,791.60

Bampton, Inc. sells baby strollers to customers over the internet. History has shown that 2% of Bampton's strollers will need repair under the warranty program. For the year, Bampton has sold 4,000 strollers and 45 have been repaired. If the estimated cost to repair a stroller is $200, what would be the warranty expense for the year?

16,000

Bampton, Inc. sells baby strollers to customers over the internet. History has shown that 2% of Bampton's strollers will need repair under the warranty program. For the year, Bampton has sold 4,000 strollers and 45 have been repaired. If the estimated cost to repair a stroller is $200, what would be the warranty liability at the end of the year?

7,000

Which of the following definitions describes a term bond? A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer.

A

Which of the following is not a true statement? A. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing B. As a company's level of debt increases, the risk of bankruptcy increases C. Interest expense incurred when borrowing money,as well as dividends paid to stockholders, are both tax-deductible D. The mixture of liabilities and stockholders' equity a business uses is called its capital structure

C

Which of the following is not true regarding callable bonds? A. This feature allows the borrower to repay the bonds before their scheduled maturity date. B. This feature helps protect the borrower against future decreases in interest rates. C. Callable bonds benefit the bond investor. D. A bond can be both callable and convertible.

C

To determine if a bond will be issued at a premium, discount or at face value, one must know which information?

a strand interest rate and the market interest on the date the bonds were issued

Question - LO5 Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?

bond X will sell for more than Bond Y

(T/F) We can calculate the issue price of a bond as the face amount plus the total periodic interest payments

false

(T/F) For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds

false

(T/F) Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement

false

(T/F) The mixture of debt and equity securities is generally the same for most companies.

false

(T/F) We record gain contingencies when the gain is probable and the amount is reasonably estimable

false

(T/F) we record interest expense in the period in which we pay it, rather than in the period we incur it

false

(T/F)Question - LO6 When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time

false

The carrying value, using the effective interest method, would increase each year:

if the bonds were sold at a discount

a 500,000 bond issue sold for 510,000. therefore, the bonds

sold at a premium because the stated interest rate was higher than the market rate

the rate quoted in the bond contract used to calculate the cash payments for interest is called the

stated rate

In each succeeding payment on an installment

the amount of interest expense decreases