accounting ch 9

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a

credit to notes payable for $24,000

Warner Inc. issues bonds at a premium. Warner's journal entry to record the issuance should include....

debit to cash credit to premium on bonds payable credit to bonds payable

Munchen Co. sold bonds at a premium. Over the life of the bonds, the carrying value of the bonds will....

decrease

a bond will be issued at a discount when the market rate of interest is...

greater than the stated rate

lease

is a contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time

bonds

is 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 and usually are issued to many lenders

stated interest rate

is the rate quoted in the bond contract used to calculate the cash payments for interest used to compute the cash interest paid to bondholders

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

lower

the higher the market interest rate on bonds the _______ will be the issue price

lower

premium

occurs when the issue price of a bond is above its face amount.

market interest rate (yield rate) (effective interest rate)

represents the true interest rate used by investors to value the bond issue

Bond Characteristic Definition Secured Bonds are backed by collateral. Unsecured Bonds are not backed by collateral. Term Bond issue matures on a single date. Serial Bond issue matures in installments. Callable Borrower can pay off bonds early. Convertible Lender can convert bonds to common stock.

true

T/F Interest expense incurred when borrowing money is tax-deductible, whereas dividends paid to stockholders are not tax-deductible.

true

most bonds issued today are

unsecured

carrying value

the balance in the bonds payable account, which equals the face value of bonds payable minus the discount or the face value plus the premium

capital structure

the mixture of liabilities and stockholders' equity in a business determined in a balance sheet

what info is necessary to calculate the issue price of bonds?

face amounts of bonds interest payment each period number of periods to maturity

the lower the market interest rate on bonds, the ______ will be the bond issue price

higher

installment payment

includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance

default risk

refers to the possibility that a company will be unable to pay the bond's face amount or interest payments as they become due

ABC Co. 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 the 6% interest rate makes the bond more attractive and investors are willing to pay more

T/F When interest rates go down, bond prices go up.

true

if a bond issues at "101" it means that it sells at

101% of its face amount

Wichtel Co. issues a $100,000 face amount, 10% semiannual bonds that are due in 7 years. The market interest rate is 8%. To calculate the issue price of the bonds, Wichtel should use an interest rate of __% and __# of interest periods

4; 14 8%/2= 4%; 7 years x 2 (semiannual)= 14

retired bonds

When the issuing corporation buys back its bonds from the investors

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

a debit to interest expense of $500 a credit to interest payable of $500

what are methods of long-term financing with debt?

bonds leases notes payable

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

cash for $98,000 discount on bonds payable for $2,000

annuity

cash payments of equal amounts over equal time intervals

the journal entry to record the issuing of 100 bonds at their $1000 face value will include a debit to _____ and a credit to _______

cash; bonds payable

discount on bonds payable account is classified as a...

contra liability

On Jan 1st, year 1, Liang Co. issues $100,000 bond at a discount for $95,083. The coupon rate is 10% and the effective-interest rate is 12%. The bonds pay interest semiannually. The journal entry to record the interest payment on June 30th Year 1 will include....

credit cash $5,000 (100,000x10%x(6/12)=5,000)

a bond will be issued at a premium when the market rate of interest is...

less than the stated rate

amortization schedule

provides a summary of the cash paid, interest expense, and decrease in carrying value for each monthly payment.

debt financing

refers to borrowing money from creditors (liabilities)

equity financing

refers to obtaining investment from stockholders