Acc326 ch 11 learnsmart
Slater company issued $1 million face amount bonds for $1.1 million. On the date of maturity, the carrying value of the bonds (assuming that interest has already been accrued) will be equal to
$1 million
Jane, a new staff accountant is trying to calculate the present value of a long-term liability. Which of the following information does Jane need to consider to calculate the present value of the liability?
the effective interest rate cash flows related to the obligation the stated interest rate
On Jan 2, 2013, Merchant company purchases $100,000 bonds at 98. The bonds mature in five years and pay 6% interest semi-annually on June 30 and Dec 31. Merchant decides to utilize the straight-line method of amortization. On Dec 31, 2013, Merchant should credit interest revenue for:
$3,200 3,000 + 200 amortization 100,000 x 6% = $6,000 $6,000/2 = $3,000 Because semi-annually
Small company purchases new machinery by signing a $100,000 face amount 2-year note. The market interest rate is 8%, but no interest is due over the life of the note. Small should recognize a net note payable of
$85,734 100,000 x 0.85734
On Jan 2, 2013, Schneider company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds.
$95,842 (100,000x0.70892) + (3,000 x 8.31661)
On the date bonds are issued, bond issue costs should be recognized as _____.
assets
Zero-coupon bonds create a tax advantage for the_____ company
issuing
Periodic interest expense is recognized based on the _______ interest rate and may not be equal to the amount of interest _______.
effective; paid
Loan with lump-sum principal payment at maturity
periodic payment includes only interes
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased
The times interest earned ratio is calculated by dividing ______ ______ plus _______ plus _______ by interest.
net income; interest; taxes
Installment loan
Periodic paymen includes interest and a portion that reduces the outstanding loan.
Katie company issues $14 million in bonds. The bonds are well recieved by investors solely base on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a _______ bond
debenture
When a promissory note matures and is paid, the borrower should ____ notes and the lender should _____ notes recievable
debit;credit
Munchen Company sold bonds at a premium. Over the life of the bonds, the carrying value of the bonds will
decrease
Use of the straight-line method for amortizing bond discounts and premiums is justified with reference to the _____ concept.
materiality
On Jan 1,2012, Wormer Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years and sell for $191,684. On June 30,2012, the company recognizes interest expense of $6,709. The company should also
Credit discount on bonds payable for $709
Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct? Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000 Debit investment inbonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000
Debit investment inbonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000
Which of the following amounts will be the same each year if the straight-line method of amortizing bond discounts and premiums is used? Interes expense or revenue Amortization Bond carrying value
Interest expense or revenue amortization
Which of the following type of companies are likely to issue bonds? Mid-size companies Large companies Small companies
Mid-size companies Large companies
U.S. GAAP
Recognize a separate asset for issue costs.
The mirror image of investments in bonds is ____ _____
bonds payable
On Jan 2, 2013, Proper Company issues $2,000,000 of 6% bonds. Interest of $60,000 is payable semi-annually on June 30 and Dec 31. The market yield for bonds of similar risk and maturity is 7%. The bond are issued at 98. What issue price did Proper recieve, upon issuance, for its bonds?
$1,960,000
On Jan 2, yves company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and Dec 31 Yves decides to utilize the straight-line method of amortization. On Dec 31,2013, Yves should debit interest expense for
$16,000 $15,000 + $1,000 amortization $500,000 x 6% = 30,000 Semi-annually: 30,000/2 = $15,000
Which of the following are valid valution methods for reporting bonds payable? Par value regardless of issue price Amortized cost Current Fair value on each reporting date
Amortized cost Current Fair value on each reporting date
WHich of the following statements is correct? Bonds sell for their face amount if they are issued near the original interest date. Bonds may sell below, above, or at their face amount. Bonds always sell for their face amount.
Bonds may sell below, above, or at their face amount.
Which of the following financial statement item can be valued at fair market value? Financial assets Financial Liabilities Shareholders equity Nonfinancial assets Nonfinancial liabilities
Financial assets Financial Liabilities
Which of the following is true regarding the tax advantage of zero-coupon bonds? Zero-coupon bonds lead to tax refunds equal to the unamortized discount. Interest expense is deductible without related cash flows.
Interest expense is deductible without related cash flows.
Which of the following is true regarding a debenture bond? It is secured by the issuers long-term assets. It is secured by the faith and credit standing of the issuer. It us secured by an outside third party.
It is secured by the faith and credit standing of the issuer
The return on assets is calculated by dividing ____ ____ by the total assets
Net income
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.
Premium on bonds payable for $75,000 Bonds Payable for $2,500,000
The issue price of a bond is always equal to the
Present value of the future cash flows
A company that recognizes a long-term notes payable has signed the legal document referred to as a _____ note
Promissory
Which of the following cash flows typically associated with already issued bonds? The face amount at maturity Amortization of gains and losses Periodic interest payments
The face amount at maturity Periodic Interest Payments
The specific promises made to bondholders are described in a document called a bond _______.
indenture
Installment notes typically involve the purchase of assets and require periodic
installment payments over time
On Jan 1, 2012, Smite corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and Dec 31. On Dec 31, Smite corp should debit
interest expense for $12,000
In a private offering the bonds are sold to an ______ investor
single
On Jan 2,2013, Meister company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and Dec 31. The bonds mature in 5 years. The bons 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 payable of
$200,000
The following selected information pertains to Wilson company. Net income: $50; taxes: $20; interest: $10. The company's times interest earned ratio is
8. ($50+$20+$10)/$10
Periodic payments on installment notes typically include:
A portion that reflects interest at the effective interest rate. A portion that reduces the outstanding loan balance.
Which of the following statements are correct regarding bond yields. All bonds issued at a given point of time will yield the same return. Supply and demand influence bond yields. Bond issues are priced to yield the market rate.
Supply and demand influence bond yields. Bond issues are priced to yield the market rate.
Bonds that systematically mature over a series of years are called ____ bonds.
serial
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
$2,575,000 (10,000 x 1,000 + 300,000) x 25%
Munster company issues $5 million face amount bonds engaging the services of an underwriter. Munster recieves $4.8 million from the underwriter, who resells the bonds to individual investors for a total sum of $5.1 million. Munster company incurred debt issue cost associated with choosing an underwriter of.
$300,000
At the beg of the current year, Wagner Company purchases equipment and signs an installment note requiring 6 annual equal payments at the end of each year. The equipment would sell for $200,000 if the company paid cash. the company's effective borrowing rate is 7%. wagner must make annual installment payments of (use tables from textbook)
$41,959 200,000/4.76654
On Jan 2,2015, Meister company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and Dec 31. The bonds mature in 5 years. The bons were issues for $191,684 with an effective interest rate of 7%. Effective interest recognized on June 30,2015, will be equal to
$6,709 $191,684 x 0.035 (7% semiannually)
Which of the following costs are associated with issuing both publicly and privately placed bonds? Accounting fees Underwriting fees SEC filing fees Legal fees
Accounting fees Legal Fees
Which of the following statements are correct regarding FASB's response to the counterintuitive results produced by fair value adjustment for debt. FASB requires that companies disclose holding gains arising from fair value adjustments on debt. FASB is reconsidering the accounting treatment. FASB recently eliminated the fair value option for reporting debt.
FASB requires that companies disclose holding gains arising from fair value adjustments on debt. FASB is reconsidering the accounting treatment.
Which of the following represent the typical characteristics of liabilities? Future cash payments cannot be measured. Interest accrues as time passes. The requirement of future cash payments. Future cash payments are certain or estimable.
Interest accrues as time passes. The requirement of future cash payments. Future cash payments are certain or estimable.
Which of the following is correct regarding the effective interest method? Interest recorded is equal to the effective interest rate multiplied by the issue price. Interest paid is equal to the effective interest rate multiplied by the maturity value Interest recorded is equal to the effective interest rate multiplies by the outstanding balane of the debt.
Interest recorded is equal to the effective interest rate multiplies by the outstanding balane of the debt
Peter company issues 10-year bonds on October 1,2015. The bonds pay 6% interest semi-annually. Peter Company has a calender year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/15 income statement relating to this bond issue? Peter should recognize 3 months of interest. Peter should not recognized any interest until April 1,2016. Peter should recognize 6 months of interest.
Peter should recognize 3 months of interest
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? 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. Including a call feature when the bonds are issued.
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 the time value of money.
Installment loan
The loan balance is reduced over time and reaches zero at the end of the loan term.
Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? The value of the conversion feature is recognized as additional paid-in capital. The value of the conversion feature is not recognized separately.
The value of the conversion feature is not recognized separately.
Which of the following are correct regarding bonds? 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. They obligate the issuing company to pay an estimated amount. 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 a specific amount.
Which of the following are true regarding zero-coupon bonds? Zero-coupon bonds issue at deep discounts. Zero-coupon bonds do not pay interest. Zero-coupon bonds are interest free.
Zero-coupon bonds issue at deep discounts. Zero-coupon bonds do not pay interest.
Which of the following represents a correct statement regarding zero-coupon bonds? Zero-coupon bonds are very popular with a variety of investors. Zero-coupon bonds represent only a small portion of the bond market. The typical investors enjoy a tax-exempt or tax-deferred status. Zero-coupon bonds are very common types of bonds.
Zero-coupon bonds represent only a small portion of the bond market. The typical investors enjoy a tax-exempt or tax-deferred status.
Over time the carrying value of bonds issued at a premium decreases becuase the premium is ________
amortized
convertible bonds can be exchanged for shares of stock at the option of the ______
bondholder
Margot, an accounting student, tries to determine wether a bond sells at a premium, discount, or face amount. Margot can determine whether the bond sells at a premium,discount or face amount
by comparing the effective and stated interest rates
When the straight-line method of amortizing bond premiums and discounts is utilized, an amortization schedule is unnecessary because the amount of interest expense and revenue and the amount of amortization are ________ each year.
constant
______ bonds can be exchanged for shares of stock at the option of the bondholder
convertible
As a general rule, periodic interest is calculated by multiplying the _____ interest rate by the amount of the debt ______.
effective; outstanding
Interest expense to the issuer and interest revenue to the investor are calculated each period as the ______ rate times the debt ______ during the interest period.
effective; outstanding
Abby corp. purchases a machine and signs a $20,000 note. The note requires periodic payments of 8% interest. The equipment would normally sell for $19,000 in cash. This implies that the company's implicit interest rate probably is
higher than 8%
A ______ interest rate is a rate that would normally apply to a particular transaction involving the exchange of an asset for a note.
implicit
In a situation where a specific interest rate is not readily apparent, deciding what the appropriate interest rate should be is called ____ an interest rate.
imputing
If a company chooses the fair value option, changes in fair value must be recognized in the
income statement
The amortization of a bond discount ____ the carrying value of the bonds.
increases
Periodic payments on installment notes include _____ and ______
interest and principal
If a company chooses to value its bonds using the fair value option, the choice is _______.
irrevocable
Gruenwald corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at the
present value of the cash payments using a 7% interest rate.
Three years ago, Harper company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the
present value of the future cash flows using original rates.
IFRS
reduce the amount of debt recognized
The debt equity ratio is calculated by dividing _____ liabilities by ______ _____.
total; shareholders equity
Mauser Company issues $1 million face amount, zero-coupon 10 year bonds to yield 4% interest. At the date of issue, what issue price will Mauser recieve for its bonds?
$675,560
On Jan 2,2013, Meister company issues $200,000 of 6% bonds. Interest of $6,000 is payable semiannually on June 30 and Dec 31. The bonds mature in 5 years. The market interest rate is 7%. The bond issues for $191,684. On June 30, the company should recognize a discount amortization of
$709 (191,684 x 0.035) - 6,000 .07/2 = .035
On Jan 2,2013, Price Co. called its $800,000, 8% bonds with a carrying value of $790,000. The call price is $788,000. The bonds originally were issued to yield 9%. On the call date, the company should recognize
A gain of $2,000
On Dec 31, Leann Corp. pays $5,120 on an installment not that requires annual payments. The outstanding loan balance on Jan 1 was $50,000; the effective interes rate is 8%. The journal entry to recognize the payment should include debits to
Installment notes for $1,120 Interest expense for $4,000
Which of the following statements regarding the fair value option is correct? It must be applied to all or none of the financial assets and liabilities. It can be applied on an "instrument-by-instrument" basis. It must be applied to all financial instruments in the same category.
It can be applied on an "instrument-by-instrument" basis.
Which of the following statements regarding the times interest earned ratio is correct? It provides assurance that the loan will be paid back at maturity. It indicates the margin of safety provided to creditors.
It indicates the margin of safety provided to creditors.
The return on shareholders equity is calculated by dividing ______ ______ by total shareholders equity.
Net income
Jackie company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium? The company's reputation must have been recently enhanced by positive publicity. The company's interest rate must be higher than that of other competing companies. The company must have issued its bonds earlier than other companies competing in the same market.
The company's interest rate must be higher than that of other competing companies.
Loan with lump sum principal payment at maturity
The loan balance reflects the face amount at the date of maturity
Which of the following are true regarding bonds sold with detachable warrants? The warrants can be sold by the bondholder to another investor. The warrants can be excercised separately from the bonds. The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock.
The warrants can be sold by the bondholder to another investor. The warrants can be excercised separately from the bonds.
Which of the following statements is correct regarding the cost associated with issuing privately placed corporate bonds? They are less costly to issue than publicly offered bonds. They are more costly to issue than publicly offered bonds.
They are less costly to issue than publicly offered bonds.
Retiring any type of debt prior to its scheduled maturity date is referred as an _____ _____ of debt.
early extinguishment
On Jan 1,2012, Water Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years and sell for 95,842. On June 30,2012, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will
increase by $354
On Jan 1,2012, Wormer Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and Dec 31. The bonds mature in 5 years and sell for $191,684. On June 30,2012, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will
increase by $709
On Dec 31, Katie Corp. recieves $5,120 on an installment note receivable. The outstanding loan balance on Jan 1 was $50,000; the effective interest rate is 8%. Payments are recieved annualy. The journal entry to recognize the reciept of this payment should include credits to
interest revenue for $4,000 installment note receivable for $1,120
A bond that sells for more than its face amount is sold at a _____
premium
Generally, liabilities are valued at their
present value