Accounting Chapter 10

A company issues $500,000 of 9%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $480,000, yielding a discount of $20,000. Using the straight-line amortization method, the company will amortize the discount by ________ on each semiannual interest payment.

$1,000 ($500,000-$480,000)=$20,000/20 periods=$1,000.

Bonds are securities that can be readily bought and sold. A bond issue consists of a number of bonds, usually in denominations of ______ or _____ and is sold to many different lenders.

$1,000; $5,000

Sheldon has a $15,000 lease liability for a machine has an interest rate of 10%. The interest expense on the lease is

$1,500 Reason: $15,000 x .10 = $1,500

A company issued $50,000 of 8%, 10-year bonds on January 1. The bonds pay semi annual interest. The present value factor of a single amount of 20 periods at 8% is 0.2145.The present value of 10 periods at 4% is 0.6756. The present value of 20 periods at 4% is 0.4564. Determine the present value of the par value of the bonds.

$22,820 Reason: Use the present value of 20 periods at 4%: $50,000 x 0.4564 = $22,820.

A company issues $100,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate the present value factor of an annuity for 3% at 10 periods is 8.5302; and for 4% at 10 periods is 8.1109. To find the present value of the interest payments, multiply _______ by the present value factor _________.

$3,000; 8.1109 Reason: Interest payment = $100,000 x 6% x 1/2 = $3,000. Interest payments are discounted at bonds' market value. Present value=1/2 of the market rate (4%) and double the number of periods (10).

A company sells a 5-year, 8% bond with a par value of $100,000 when the market is 10% for $96,454. The bond requires semi-annual interest payments of $4,000. Using the effective interest amortization method, the company will recognize _____ interest expense on the first semi-annual interest payment.

$4,823 Reason: $4,000 is the cash payment. The initial discount is $100,000 - 96,454=$3,546. Bond interest expense = $96,454 x .05 = 4,823. The discount of $823 is added to the cash payment to determine the Bond Interest Expense ($4,000 + 823)=$4823.

A company sells a 6-year, 6% bond with a par value of $100,000 when the market is 8% for $90,615 The bond requires semi-annual interest payments of $3,000. Using the effective interest amortization method, the company will recognize _____ for the amortization of the discount on the first semi-annual interest payment.

$625 Carrying value of bonds = $90,615 First semi annual interest expense = Carrying value of bonds x Market interest rate x 6/12 = 90,615 x 8% x 6/12 = 3,624.60 Semi annual interest payment = $3,000 Amortization of discount on first semi annual interest payment = First semi annual interest expense - Semi annual interest payment = 3,624.60-3,000 = $624.60

A company issues $100,000 of 10%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate that the present value factor for 3% at 5 periods is 0.8626; for 3% at 10 periods is 0.7441; for 4% at 5 periods is 0.8219 and for 4% at 10 periods is 0.6756. The present value of the par value of the bond is:

$67,560 Reason: The 5-year bonds will have 10 interest periods. Use 4% which is half of the market rate. $100,000 x 0.6756=67,560.

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by:

$9,542 $15,142-5,600=$9,542.

Wayland Company has total liabilities of $65,000 and total equity of $130,000. It's debt-to-equty ratio is ______

.5 or 0.5

A $200,000 4 year bond was issued for $210,000. The semi-annual amortization of the bond premium using the straight-line method equals $_______

1,250 Explanation: The computation of the semi-annual amortization of the bond premium is shown below: = (Issued amount - proceeds from the bonds) ÷ time period ÷ semi-annual = ($210,000 - $200,000) ÷ 4 years ÷ 2 = $10,000 ÷ 4 years ÷ 2 = $1,250 In the case of semi-annual, we simply divided by 2 so that the accurate amount can come.

A company issues $50,000 of 5%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $48,000. Using the straight-line amortization method, the company will amortize the discount by $ ______ on each semiannual interest payment.

100

A company issues $100,000 of 12%, 6-year bonds that pay interest semiannually. The bonds are issued when the market rate is 10%. The present value of an annuity table indicates that the present value factor for 5% at 12 periods is 8.8633. The present value of 1 table indicates that the present value factor for 5% at 12 periods is 0.5568. The present value of the price of the bond rounded to the nearest whole dollar is $______.

108,860

A company borrows $50,000 by signing a $50,000, 8% note that requires six equal payments of _____ (round to the nearest dollar) at the end of each year. (The present value of an annuity of six annual payments, discounted at 8% equals 4.6229.)

10816

A company borrows $50,000 by signing a $50,000, 8% note that requires six equal payments of ______ (round to the nearest dollar) at the end of each year. (The present value of an annuity of six annual payments, discounted at 8% equals 4.6229.)

10816 $50,000/4.6229

Jared's Co. has total assets of $60,000 and total liabilities of $40,000. Its debt-to-equity ratio is ____.

2.0 Reason: Assets=liabilities+equity. $60 assets = $40 liabilities + equity. Equity= ($60 - 40) = $20. $40/$20=2.0.

A company borrows $100,000 by signing a $100,000, 5% note that requires four equal payments of ______ (round to the nearest dollar) at the end of each year. (The present value of an annuity of four annual payments, discounted at 5% equals 3.5460.)

28,201 Equal Annual payment = Amount borrowed / Present value Annuity factor (r,n) = $100000 / Present value Annuity factor (5%,4) = $100000 / 3.5460 = $28200.789

A company borrows $100,000 by signing a $100,000, 5% note that requires four equal payments of ______ (round to the nearest dollar) at the end of each year. (The present value of an annuity of four annual payments, discounted at 5% equals 3.5460.) Listen to the complete question

28,201 Equal Annual payment = Amount borrowed / Present value Annuity factor (r,n) = $100000 / Present value Annuity factor (5%,4) = $100000 / 3.5460 = $28200.789 I.e. $28201

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $______

8179

Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is being sold at 93 would be trading at $______.

930

The journal entry for a right-of-use asset to record the periodic amortization includes a credit to:

Accumulated Amortization-Right-of-Use Asset

The required semiannual interest payment for a premium bond using the effective interest amortization method includes the following:

Bond Interest Expense and Premium on Bonds Payable are debited and Cash is credited

A company issues $50,000 of 8%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31, each year. If bonds are sold at par value, the issuer records the payment of principal at maturity with a debit to ______ in the amount of ______.

Bonds Payable; $50,000

When the market rate is 12%, a company issues $50,000 of 9%, 10-year bonds dated January 1, 2017, that mature on December 31, 2026, and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a debit to _______ in the amount of _______.

Bonds Payable; $50,000 When the market rate is 12%, a company issues $50,000 of 9%, 10-year bonds dated January 1, 2017, that mature on December 31, 2026, and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a debit to Bonds Payable in the amount of $50,000.

Which of the following statements are disadvantages of bond financing? (Check all that apply.)

Bonds can decrease return on equity. Bonds require payment of interest and par value.

Which of the following statements is an advantage of bond financing?

Bonds do not affect owner control.

Which of the following statements is not an advantage of bond financing?

Bonds require interest payments and payment of par value.

Which of the following is a disadvantage of bond financing?

Bonds require payment of periodic interest and the par value.

_____ bonds (and notes) have an option exercisable by the issuer to retire them at a stated dollar amount before maturity.

Callable

A company issues $100,000 of 5%, 10-year bonds dated January 1. The bonds pay interest semiannually on June 30 and December 31 each year. If the bonds are sold at par value, the issuer records the sale with a debit to _______ in the amount of $______

Cash 100000 or $100,000

A company issues $75,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the payment of principal at maturity with a credit to ______ in the amount of $______.

Cash 75000

Par

Contract rate is equal to market rate

Premium

Contract rate is greater than the market rate

Discount

Contract rate is less than the market rate

_____ bonds (and notes) can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Convertible

When the market rate is 10%, a company issues $60,000 of 12%, 10-year bonds dated January 1, 2017, that mature on December 31, 2026, and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a (debit/credit) ______ to Cash in the amount of $______.

Credit 60,000

A company issues $100,000 of 6%, 10-year bonds dated January 1, that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the first semi-annual interest payment with which of the following entries? (Check all that apply.)

Credit to Cash for $3,000. Debit to Interest Expense for $3,000.

A company issues $500,000 of 6%, 10-year bonds dated January 1, 2017 that mature on December 31, 2026. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with which of the following entries?

Debit to Cash $500,000; and credit to Bond Payable $500,000.

A company issues $50,000 of 9%, 10-year bonds dated January 1, 2018, that mature on December 31, 2027, and pay interest semiannually for $2,250. On December 31, 2022, when the bond premium is $2,500, the bonds are called for $52,000. The journal entry to record this transaction would record a (Gain/Loss) ______ on bond retirement in the amount of ______.

Gain; $500 $50,000+2500=$52,500. $52,000-$52,500=$500 Gain.

A company issues $100,000 of 5%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the first semi-annual interest payment with a debit to which of the following accounts and in what amount?

Interest Expense, $2,500

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $8,179. The journal entry to record this payment will include a debit to which of the following accounts and in what amount? (Check all that apply.)

Interest Expense; $4,800 Notes Payable; $8,179 Reason: Debit Interest Expense for $4,800 and Notes Payable for $8,179.

A company issues $50,000 of 9%, 10-year bonds dated January 1, 2009, that mature on December 31, 2018, and pay interest semiannually for $2,250. On December 31, 2013, when the bond premium is $2,500, the bonds are called for $54,000. The journal entry to record this transaction would record a (Gain/Loss) ______ on Bond Retirement in the amount of ______.

Loss; $1,500 Book value of bonds = $50,000+2,500=$52,500. Cash paid $54,000 - 52,500=$1,500 loss.

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by $9,542. The journal entry to record this transaction will include a debit to which of the following accounts and for how much? (Check all that apply.)

Notes Payable; $9,542 Interest Expense $5,600

The bond carrying value can be determined by which of the following formulas?

Par value - discount on bonds payable

_______ bonds (and notes) have specific assets of the issuer pledged (or mortgaged) as collateral.

Secured

_______ bonds (and notes) mature at more than one date (often in series) and, thus, are usually repaid over a number of periods. Multiple choice question.

Serial

_____ bonds (and notes) are scheduled for maturity on one specified date.

Term

Which of the following are true of amortizing a premium bond using the effective interest amortization method:

The semiannual cash interest payment is larger than the bond interest expense. The excess of the cash payment over the interest expense reduces the principal.

_______ bonds (and notes), also called debentures, are backed by the issuer's general credit standing.

Unsecured

Forever, Inc. announces an offer to issue bonds with a $100,000 par value, an 8% annual contract rate (paid semiannually) and a two-year life. The market rate is 10%, so the bonds will be sold at:

a discount

The difference between the cash interest paid and the bond interest expense is the premium ______ under the effective interest of amortization of a bond premium method.

amortization

Most bonds require par value to be repaid _______ and interest to be paid _________.

at the maturity date; semiannually

Bonds payable to whomever holds them are called _____ bonds or unregistered bonds.

bearer

A(n) ______ is the issuer's written promise to pay an amount equaling the par value. The par value is paid at a specified future date. Most often, the issuer is required to make semiannual interest payments.

bond

When a bond is sold at a discount, the ________ value will increase at each semi-annual interest payment by the amortization of bond discount.

carrying

A bond ______ is evidence of the company's debt. Listen to the complete question

certificate

A bond _________ may be issued as evidence of the company's debt.

certificate

The ________ rate is the interest rate specified in the indenture—sometimes referred to as the coupon rate, stated rate, or nominal rate.

contract

Holders of ______ bonds have the right to convert their bonds to stock. When conversion occurs, the bonds' carrying value is transferred to equity accounts and no gain or loss is recognized.

convertible

A company issues $400,000 of 8%, 10-year bonds dated January 1. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with a (debit/credit) ______ to Bond Payable in the amount of $______

credit 400000

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Bond Payable in the amount of _______.

credit; $100,000 A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a credit to Bond Payable in the amount of $100,000

A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to (Discount/Premium) ______ on Bonds Payable in the amount of $5,000.

credit; Premium

A company issues $50,000 of 9%, 10-year bonds dated January 1, 2018, that mature on December 31, 2027, and pay interest semiannually of $2,250. On December 31, 2022, when the bond premium is $2,500, the bonds are called for $55,000. The journal entry to record this transaction would record a (debit/credit) ______ to Loss on Bond Retirement of $2,500.

debit

A company issues $60,000 of 5%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $59,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Discount on Bonds Payable in the amount of $______.

debit 1000

A company issues $90,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $85,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Discount on Bonds Payable in the amount of $______.

debit 5000 Debit, $ 5000 Explanation; Here the discount amount = $ 90000 - $ 85000 = $ 5000 And the journal entry should be Debit cash for $ 85000 , debit discount on bonds payable for $ 5000 and credit bonds payable for $ 90000.

A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the $5,000 premium on bonds payable will ________ total interest expense recognized over the life of the bond.

decrease

When a bond is sold at a premium, the carrying value will _______ each period that the premium is amortized.

decrease

A company issues $60,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $62,000 for the bonds, the premium on bonds payable will (increase/decrease) ______ total interest expense recognized over the life of the bond by $______.

decrease 2000

A(n) ______ on bonds payable occurs when a company issues bonds with a contract rate less than the market rate.

discount

When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a(n) .

discount

The _________ method allocates total bond interest expense over the bonds' life in a way that yields a constant rate of interest.

effective interest

Total bond interest ______ is the sum of the interest payments plus the bond discount.

expense

A finance lease is a long-term lease which meets one or more of the following criteria:

has a purchase option that lessee is reasonably certain to exercise lease term is for major part of asset's remaining economic life transfers ownership to lessee

The legal document identifying the rights and obligations of both the bondholders and the issuer is called the bond ______. This document describes the number of bonds authorized, their par value, and the contract interest rate.

indenture

The legal document that describes the rights and obligations of both the bondholders and the issuer is called the bond ______.

indenture

A company borrows $60,000 from a bank to purchase equipment. It signs an 8% note requiring six annual payments of principal plus interest. This is an example of a(n) ______ note.

installment

A(n) _____ note is an obligation requiring a series of payments to the lenders.

installment

A bond discount increases __________ at each semi-annual interest payment.

interest expense

While the straight-line method of amortizing bond premium or discounts keeps the amortization equal over the life of the bond, the effective interest method keeps the __________ equal over the life of the bond.

interest rate

A(n) ______ is a contractual agreement between a lessor (asset owner) and a lessee (asset renter or tenant) that grants the lessee the right to use the asset for a period of time in return for cash (rent) payments. Listen to the complete question

lease

The bond's _______ rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

market

The rate that borrowers are willing to pay and lenders are willing to accept for a particular bond at its risk level is called the bond's ______ rate.

market

The par value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's ______ date.

maturity

A(n) _______ is a legal agreement that helps to protect a lender if a borrower fails to make required payments on notes or bonds. This agreement gives the lender the right to be paid from the cash proceeds of the sale of the borrower's assets, as identified in the agreement.

mortgage

Star Bank provided cash to a customer, J. Brown, to pay for a building. Star required that Brown also sign a(n) ______ (mortgage/installment/bond) note payable, which allows the bank to be paid by the cash proceeds of the sale of the building if Brown fails to pay on the note.

mortgage

Lyle Co. borrowed $20,000 from First Bank by signing a written promise to pay a definite sum of money on a specific future date. Lyle will record this in the general ledger as a(n) _____ payable

note or notes

A _____ _____ is similar to a bond payable but is normally transacted with a single lender such as a bank.

note payable

A bond is its issuer's written promise to pay an amount equaling the _____ value of the bond with interest.

par

The ________ value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's maturity date.

par

The bond carrying value can be determined by taking the bond value ______ minus the discount on bonds payable.

par

The bond contract rate determines the annual interest paid by multiplying the bond ______ value by the contract rate.

par

Most bonds require (interest/par) ______ value to be repaid at maturity and (interest/par) ______ to be paid semiannually.

par interest

When the contract rate of the bonds is higher than the market rate, the bond sells at a higher price than par value. The amount by which the bond price exceeds par value is the _______ on bonds.

premium

When the market rate is less than the bond contract rate on the date of issuance, the bonds will be sold at a (discount/premium) ______

premium

Under the effective interest amortization of a premium bond, the _____ account is debited for the amortization of the interest expense.

premium on bonds payable Reason: Under the effective interest amortization of a premium bond, the premium on bonds payable account is debited for the amortization of the interest expense.

Bonds issued in the names and addresses of their holders are _______ bonds.

registered

Many bonds are (sinking/secured) ______ fund bonds, which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds. Listen to the complete question

sinking

Many bonds are _______, which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

sinking fund bonds

Convertible bondholders have the right to convert their bonds to _____.

stocks

The ________ bond amortization method allocates an equal portion of the total bond interest expense to each interest period.

straight-line