ACT 210 Chapter 9

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

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

1. A credit to bonds payable for $100,000 2. A debit to discount on bonds payable for $2,000

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?

1. A debit to Cash of $110,000. 2. A credit to Premium on Bonds Payable of $10,000 3. A credit to Bonds payable of $100,000

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:

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

The two types of financing are:

1. Debt 2. Equity

Identify two ratios commonly used to assess a company's financial risk.

1. Times interest earned ratio 2. Debt to equity ratio

True or false: The times interest earned formula is net income divided by interest expense.

False ; The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense.

Which of the following is true regarding a debenture bond?

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

Bonds that systematically mature over a series of years are called:

Serial bonds

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

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.

false ; The debt to equity ratio is total liabilities divided by total stockholders' equity.

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ____________ risk.

financial

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

installments

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by ________________ _______________.

interest expense

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

lease

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

liabilities ; equity

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

long-term debt

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

market

A common reason for redeeming a bond prior to its maturity date is that:

market interest rates decreased.

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.

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

When a corporation repurchases its bonds from the bondholders, the corporation _______________ the bond.

retires

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

Corporate bonds most often pay interest _________________.

semiannually

Callable bonds can be redeemed at the choice of _________________.

the bond issuer

The price of a bond includes:

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

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 ________________ bond.

unsecured

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 ; 95,842 x 0.035

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 bond

The debt to equity ratio is calculated as:

total liabilities divided by total stockholders' equity.

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

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 ; 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.

What is necessary to calculate the issue price of bonds?

1. number of periods to maturity 2. interest payment each period 3. face amount of bonds

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 ______.

1. a debit to Interest expense of $500 2. a credit to Interest payable of $500

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

1. face amount of bonds 2. number of periods to maturity 3. interest payment each period

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 ______.

1. a debit to Interest expense of $6,000 2. a credit to Cash of $6,000

Bonds may issue at:

1. a discount 2. a premium 3. face amount

Periodic payments on installment notes typically include:

1. a portion that reflects interest. 2. a portion that reduces the outstanding loan balance.

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

1. debit to Cash 2. credit to Premium on Bonds Payable 3. credit to Bonds Payable

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. ; The bond sold at a discount because the stated rate of 10% is lower than the market rate of interest. The debit to Interest Expense will be greater because it is based on the market rate. The credit to Cash will be less because it is based on the lower stated interest rate.

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.

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

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

A corporation that wishes to borrow from the general public rather than a bank will issue:

bonds

Werner issues bonds at a discount. The related Discount account should be classified as a __________ - ______________.

contra - liability

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

convertible

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

decrease

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

Term

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

stated

The _______________ rate of interest on a bond is the interest rate printed on the bond, whereas the ________________ rate of interest is the current rate of interest being paid on investments with similar characteristics.

stated; market

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?

1. Credit discount on bonds payable $705 2. Debit interest expense $5,705 3. Credit cash $5,000

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?

1. Debit to interest expense $3,211 2. Credit cash $4,000 3. Debit premium on bonds payable $789

Which of the following are correct regarding bonds?

1. They obligate the issuing company to repay the bonds at a specific date. 2. They obligate the issuing company to pay a specific amount.

True or false: Bonds may be retired at maturity or retired early.

true

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

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 ; 191,684 x 0.035 (7% semiannually)

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

Most corporate bonds pay interest __________________.

semiannually

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