chapter 14 bonds and long term notes.

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

automobiles buildings land

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 Multiple choice question. $260,000. $212,000. $200,000.

$200,000.

The primary purpose of the call feature associated with bonds is to Multiple choice question. 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.

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). Multiple choice question. $100,000 $115,589 $81,307 $107,000

$115,589

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 Multiple choice question. $709 $0. $354. $125.

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

The interest rate on notes payable typically is equal to the Blank______ rate. Multiple choice question. prime market credit short-term borrowing

market

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? Multiple choice question. Reduce the cash proceeds and increase the bonds payable account Increase the cash proceeds and increase the discount and debt issue costs account Reduce the cash proceeds and increase the discount and debt issue costs account

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

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? Multiple choice question. Reduce the cash proceeds and increase the bonds payable account 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 discount and debt issue costs account

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

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

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

debt to equity ratio.

The interest rate on notes payable typically is equal to the Blank______ rate. Multiple choice question. prime market short-term borrowing credit

market

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

discount

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

notes payable

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

notes receivable

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

notes receivable

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

pay no interest

True or false: The interest rate stated in a note is typically equal to the market rate.

True

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 record what journal entry? (Select all that apply.) Multiple select question. credit investment in bonds $200,000 credit bonds payable $200,000 debit cash $200,000 credit cash $200,000 debit investment in bonds $200,000

credit cash $200,000 debit investment in bonds $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). Multiple choice question. $217,966 $215,567 $200,000 $183,777

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

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 Multiple choice question. 1.27. 0.79. 1.32. 1.47.

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

Which of the following statements is correct? Multiple choice question. Bonds sell for their face amount if they are issued near the original interest date. Bonds always sell for their face amount. Bonds may sell below, above, or at their face amount.

Bonds may sell below, above, or at their face amount.

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) Multiple select question. Including a call feature when the bonds are issued. Factoring bonds through a licensed factor. 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 correct regarding the effective interest method? Multiple choice question. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. Interest paid is equal to the effective interest rate multiplied by the maturity value. 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.

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. Multiple choice question. Periodic interest is incurred Periodic interest must be paid Periodic principal payments must be made

Periodic interest is incurred

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? Multiple choice question. 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.

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? Multiple choice question. The difference represents a premium. The difference represents the time value of money. The difference represents a discount.

The difference 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? Multiple choice question. 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 be used if a company irrevocably elects the method on the bond issue date.

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

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

Which of the following are correct regarding bonds? (Select all that apply.) Multiple select question. They obligate the issuing company to repay the bonds when interest rates increase. 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 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 a specific amount.

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

To enable smaller or debt-heavy companies to gain access to the bond market. To use a medium of exchange in mergers and acquisitions. To sell the bonds at a higher price.

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

Zero

Which of the following are true regarding zero-coupon bonds? (Select all that apply.) Multiple select question. 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.

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.) Multiple select question. 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 payable for $2,500,000.

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

present value.

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

promissory

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

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

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

repay a certain amount at a specific date.

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

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

Debt issue costs Multiple select question. 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. do not affect the cash proceeds from the issuance of debt.

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

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: Multiple choice question. return on the company's equity return on the company's debt value of the asset or service exchanged interest rate stated on the note

value of the asset or service exchanged

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 Multiple choice question. $2,500,000 $2,575,000 $10,300,000

$2,575,000 Reason: (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 Multiple choice question. $200,000. $212,000. $260,000.

200,000

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

A document detailing the promises made by the bond issuer.

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? Multiple choice question. The $1.2 million represents a premium. The $1.2 million represents a discount. The $1.2 million represents the time value of money.

The $1.2 million represents the time value of money.

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

accrued since the last interest date

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

accrued since the last interest date

The difference between the effective interest and the interest paid represents Multiple choice question. a gain or loss due to changes in market interest rates. the time value of money.

amortization of a discount or premium.

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

convertible

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

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

indenture

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

premium

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

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

mislead investors.

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

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

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 Multiple choice question. value of the purchased equipment. interest rate stated in the note. maturity amount of the note.

value of the purchased equipment.