Chapter 9 SmartBook

Which of the following statements is correct?

Bonds may be retired at maturity or retired early.

Most corporate bonds pay interest

semiannually.

The __________ rate of interest is used to compute the cash interest paid to bondholders.

stated

The rate of interest printed on the face of a bond is referred to as the __________ interest rate.

stated or face

A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)

bond. Reason: Common stock is not debt; common stock is equity.

The price of a bond includes

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

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 6%, the bonds will issue at

face amount.

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$88,699 Reason: (5.65022 x $10,000) + (0.32197 x $100,000) = $88,699

True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.

False Reason: The stated rate is not always equal to the market rate of interest.

__________ bonds are supported by a specific asset the issuer pledges as collateral.

Secured

__________ bonds require payment of the full principle amount of the bond at the end of the loan term.

Term

Corporate bonds most often pay interest __________.

semiannually

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as

term bonds

Bonds will be issued at a premium if the stated interest rate is

greater than the market interest rate.

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance of the bonds should include debit(s) to:

Cash for $98,000 Discount on bonds payable for $2,000 Reason: The discount reduces cash received

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

Cash; Bonds Payable Reason: The entry to record the issuance of bonds includes a debit to Cash and a credit to Bonds Payable.

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.

a debit to Interest expense of $6,000 a credit to Cash of $6,000 Reason: Since no previous adjusting entry was recorded to accrue interest, there would be no Interest payable balance to decrease. The debit is to Interest expense and a credit to Cash for $6,000.

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 7%, the bonds will issue at

a discount.

Periodic payments on installment notes typically include

a portion that reflects interest. a portion that reduces the outstanding loan balance.

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at

a premium.

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

A debit to discount on bonds payable for $2,000 A credit to bonds payable for $100,000 Reason: $98,000 issuance - $100,000 face value; discount is a contra-liability, resulting in debit

Mann Inc. issues $100,000 bonds at face amount. The bonds pay interest of 6%. Berkely Inc., a company with comparable risk, issues $100,000 bonds, paying 5% interest for $98,000 Which of the following is true?

Both bonds yield a return of 6% to investors.

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price?

The issue price will be above the bond's face value. Reason: The 6% interest rate makes the bond more attractive and investors are willing to pay more.

Which of the following are correct regarding bonds?

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

True or false: When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.

True Reason: The two components for pricing a bond are the interest payments and the repayment of principal.

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.

a credit to Interest payable of $500 a debit to Interest expense of $500 Reason: The interest payment will be made on December 31, not January 31.

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a

debit to Cash of $100,000 and a credit to Bonds payable of $100,000.

The two types of financing are

debt financing. equity financing.

Financing with __________ requires borrowing, whereas financing with __________ requires issuing shares of stock.

debt; equity

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

Loans requiring periodic payments of interest and principle are referred to as __________ notes.

installment

A(n) __________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

lease

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)

lease.

When a corporation repurchases its bonds from the bondholders, the corporation __________ the bonds.

retired

On January 1, year 1, Ziegler issued 5-year bonds with a stated rate of 8% and a face amount of $100,000. The bonds pay interest semiannually. The market rate of interest was 10%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$92,278 Reason: (7.72173 x $8,000 x 0.5) + (0.61391 x $100,000) = $92,278

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:

long-term liabilities

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long-term debt

For a bond issued at a discount, the stated interest rate will be __________ than its yield or return earned by bond investors.

lower

Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value is equal to face amount at the date.

maturity

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

secured