ACCT Ch 9 LS

_____ has grown into the most popular method of external financing of corporate assets in America.

Leasing

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

face

On the maturity date, the carrying value of bonds issued at a premium will be equal to the

face amount

Which of the following information is necessary to calculate the issue price of bonds?

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

Bonds frequently are not issued at _____ because the market interest rate has to be estimated; instead, they are commonly issued at ______.

face amount; a discount

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

For bonds issued at a discount, interest expense will

increase over time.

True or false: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.

false

Hainzel Company issues $200,000 face amount, 6% semiannual bonds that are due in 7 years. If the market interest rate is 5%, the bonds will achieve an issue price of: (round to the nearest whole dollar)

$211,692 Rationale: ($200,000 x 0.70773) + ($6,000 x 11.69091)

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.

Bonds may issue at:

a discount face amount a premium

Match the bonds with the effect on the bond-related interest expense.

Discounted bonds Interest expense increases each interest period Premium bonds Interest expense decreases each interest period

The early retirement of a bond includes ______.

elimination of the liability payment of cash recording of a gain or loss

Debt is considered a lower cost method of financing than equity because

interest on debt is tax deductible.

Wichtel Company issues $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 Rationale: 8%/2 = 4%; 7 years x 2 (semiannual) = 14

Smith Company enters into a lease agreement with Rent-All Corp. The present value of the lease payments is equal to $25,000. Smith records:

debit lease asset $25,000 credit lease payable $25,000

Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records:

debit lease asset $50,000; credit lease payable $50,000

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

decrease

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

market interest rate

An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the _____ date.

maturity

Katie Company has outstanding bonds due in four years. Katie Company regularly deposits money in an investment account; these accumulated funds will be used to pay off the bonds in four years. Katie apparently has a

sinking fund

Bondholders are willing to pay a premium to acquire a bond because ______.

the bond's stated interest rate is higher than the market interest rate

Which of the following are typically shown in an amortization schedule related to an installment notes payable?

the cash paid each payment period the carrying value of the note at the end of the period the carrying value of the note at the beginning of the period

Most bonds issued today are ______.

unsecured

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n) _____ bond.

unsecured

Slater Company issues $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

On January 2, 2018, 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

$200,000

Munchin Corporation has $200,000 of 6% bonds that were issued in Year 1 at $202,000. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?

Credit cash $200,000 Debit bonds payable $200,000

True or false: A gain or loss is typically recognized upon retirement of bonds at or prior to maturity.

False

When is it more economical for a company to borrow funds by issuing bonds?

When the interest savings exceed the additional bond issuance costs. market interest rates decreased.

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

Convertible bonds allow the lender to convert each bond into:

common stock

Werner issues bonds at a discount. The related Discount account should be classified as a(n) _____ _____.

contra liability

The Discount on Bonds Payable account is classified as a(n)

contra-liability.

A bond that sells for less than its face amount is sold at a(n) _____.

discount

Most bonds are issued at a slight _____.

discount

If bonds are retired before the maturity date, this is considered a(n)

early extinguishment of debt.

_____ financing refers to obtaining investment from stockholders.

equity

An advantage to financing with debt is that

interest is tax deductible

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

Bonds and leases are normally classified as ______ liabilities.

long-term

The terms "effective interest rate" and "yield rate" refer to the _____ interest rate.

market

A bond that sells for more than its face amount is sold at a(n) _____.

premium

Neumann Corporation is planning to issues bonds with a face amount of $2 million. If Neumann's accountant, Betty, wants to calculate the expected issue she should calculate the ____ of the related future cash payments using the ____ interest rate.

present value; market

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) _____ placement.

private

The primary purpose of the call feature associated with bonds is to

protect the issuer against declining interest rates.

Convertible bonds may be beneficial to lenders (bond issuer) because they tend to:

require a lower interest rate than bonds issued without the conversion feature

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

retires

Margot Inc. issues $10 million in bonds, of which $2 million are due each year for the next 5 years. Margot Inc.'s bonds are commonly referred to as a

serial bonds

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

stated

Convertible bonds may be beneficial to bond investors because:

the value of the common stock shares received in the conversion may exceed the amount of the bond

If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?

A credit to Premium on Bonds Payable of $10,000 A debit to Cash of $110,000. A credit to Bonds payable of $100,000

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.

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

Candy Corporation has $100,000 of 8% bonds that were issued in Year 1 at face amount. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?

Debit bonds payable $100,000 Credit cash $100,000

Tyler wants to calculate the issue price of bonds. He already knows the face amount and interest payment amount. He also needs to know the

number of periods to maturity.

Bonds that systematically mature over a series of years are called _____ bonds.

serial

An investment fund into which an organization makes payments each year over the life of its outstanding debt is referred to as a(n) _____ fund.

sinking

A company's capital structure refers to

the mixture of debt and equity used to finance the company.

The price of a bond includes

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

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 debit to interest expense $500 A credit to Interest payable of $500

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 possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's _____ risk.

default

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:

default risk

In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:

equity

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

greater than the stated rate

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a discount. At end of the current fiscal period, unamortized bond discount is $1,200.The balance sheet presentation of Cabot's bonds should include:

Bonds payable of $100,000 Less discount on bonds payable of $1,200

Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:

a discount

At the beginning of a lease period, the lessee records

a lease asset and lease payable for the present value of the lease payments.

A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______.

a premium

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at

a premium

Corporate bonds most often pay interest _____.

semiannually

XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company?

$5,000 current note payable; $45,000 long-term note payable

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.

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

debt

_____ financing refers to borrowing money from creditors.

debt

When market interest rates go up, the market value of bonds

goes down

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

greater than the market interest rate.

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

secured

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

secured

The market value of bonds moves in the _____ direction of interest rates

opposite

Callable bonds can be redeemed at the choice of

the bond issuer.

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Debit interest expense $5,705 Credit discount on bonds payable $705 Credit cash $5,000

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a premium. At end of the current fiscal period, the balance of premium on bonds payable is $1,200.The balance sheet presentation of Cabot's bonds should include:

Bonds payable of $100,000 Plus premium on bonds payable of $1,200

The bond amortization schedule of Crocus Company shows that the carrying value of the bonds increased each interest period. From this information we can infer that the bonds issued at:

a discount

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

Which of the following is true regarding a debenture bond?

It is secured by the faith and credit standing of the issuer.

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.

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

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:

a lease payable a lease asset

Common terms used for the market interest rate are:

effective interest rate, yield rate

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

Which of the following are common characteristics or provisions of bonds?

term or serial convertible secured or unsecured

A corporation will issue bonds when

the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan.

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a premium. At the end of the current fiscal period, the balance of premium on bonds payable is $4,500. The liability reported on Omar's balance sheet should be:

$204,500

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:

$8,600 Rationale: $10,000 - $(2,000 - (10,000 x .06) = $8,600

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

Identify the characteristics of an annuity.

A series of amounts that are equal Equal time periods between payment dates

Match the timing of retirement with the likely income statement effect

At maturity- no gain or loss is recognized Prior to maturity- typically results in gain or loss recognized

Which of the following are methods of long-term financing with debt?

Bonds Leases Notes payable

Which of the following statements is correct?

Bonds may be retired at maturity or retired early.

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:

Discount on bonds payable for $2,000 Cash for $98,000

Smith uses a financial calculator to calculate the issue price of $800,000 face amount bonds. The bonds pay 8% interest semi-annually over a five-year period. The market interest rate is 8%. Select the correct input:

FV = $800,000 I = 4 N = 10

Emily uses a financial calculator to calculate the issue price of $100,000 face amount bonds. The bonds pay 6% interest semi-annually over a five-year period. The market interest rate is 6%. Select the correct input:

FV = 100,000 I = 3 N = 10

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

False

Which of the following information is typically shown in a bond amortization schedule?

Interest expense Cash paid Carrying value of the bonds

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.

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

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880. Rationale: $50,000 - (5,120 - 4,000 interest)

On January 1, ABC, Inc., issued $100,000 of 10%, 5-year bonds, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash?

The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.

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

In 2008, ABC Company issued $100,000 of 20-year bonds at face value. Ten years later, in 2018, the company retired the bonds early by purchasing them in the open market at $101,000. The entry to record this transaction includes ______.

a debit to Bonds payable of $100,000 a credit to Cash of $101,000 a debit to Loss on bond retirement of $1,000

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

A bond-related schedule that summarizes cash paid, interest expense, and changes in bond carrying value is referred to as a bond _____ schedule.

amortization

A series of equal amounts paid or received over equal time periods is called a(n) _____.

annuity

One way a company can protect itself from decreasing interest rates is to include a(n) _____ feature when issuing bonds.

call

On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following?

credit cash $4,000 (semi-annual int rate-6%/2=3%x$107,020) Debit premium on bonds payable $789 (semi annual int rate=6%/2=3%x$107,020) Debit to interest expense $3,211 (semi-annual int rate = 6%/2=3%x$107,020)

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

credit to Bonds Payable credit to Premium on Bonds Payable debit to cash

For bonds issued at a premium, interest expense will

decrease over time.

When bonds are issued at a premium, the carrying value of the debt _____ over time.

decreases

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:

$195,500

On January 2, 2018, Schneider 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. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest recognized on June 30, 2018, using the effective interest method, will be equal to (round to the nearest full dollar)

$3,354. Rationale: 95,842 x 0.035

Identify the correct statement(s) relating to common bond features.

Call features are more common than conversion features Bonds may be issued with both a call and a conversion feature

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

The mixture of debt financing and equity financing a company uses is referred to as the company's _____ structure.

capital

_____ bonds are retired when the bondholder exchanges them for the issuing company's stock.

convertible

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?

interest expense based on the beginning period carrying value and the effective rate of the loan the cash paid each payment period the decrease in the carrying value of the note the carrying value of the note at the end of the period

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

Improved cash flows is a common advantage of acquiring equipment through _____.

leasing

In the U.S., the most popular method for financing corporate long-term assets is:

leasing

Periodic payments on installment notes typically include

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

The bond amortization schedule of Kroken Company shows that cash paid for interest exceeds interest expense. From this information we can infer that the bonds were issued at:

a premium

ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018 (rounded to the nearest dollar)?

$5,000 Rationale: Payment to bondholders = $100,000 x 10% x (6/12) = $5,000; Interest expense is $5,537 (=92,280 x 12% (6/12)). The difference of $537 is the amortization of the discount.

On January 2, 2018, 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 bond issues for $191,684 with an effective interest rate of 7%. Interest expense on June 30, 2018, using the effective interest method, will be equal to (round to whole dollars)

$6,709. Rationale: 191,684 x 0.035 (7% semiannually)

The journal entry to recognize the signing of an installment notes payable includes:

Debit Cash Credit Notes Payable

Which of the following are possible benefits of leasing an asset rather than purchasing an asset?

Improvement in cash flows Lower periodic payments on the asset Protection against declining asset value

In a private placement of bonds, bonds may be sold to

a single large investor.

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

installment

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

interest expense for $4,000. notes payable for $1,120.

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

less than