Ch. 10- Accounting for Long-Term Liabilities

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

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

Bond market values are expressed as a percentage of their par (face) value. For example, a company's bonds might be trading at 103, meaning that they can be bought or sold for ____ of their par value.

103%

Most bonds require par value to be repaid _______ and interest to be paid _________. - at the maturity date; at the maturity date - at the maturity date; semiannually - semiannually; semiannually

At the maturity date; semiannually

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

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; $90,000 - Bonds Payable; $50,000 - Interest Expense; $50,000 - Cash; $50,000 - Cash; $90,000

Bonds Payable; $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. - Unlike equity financing, bond interest is not tax deductible. - Large bonds issuances can affect owner control.

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. - Bonds can decrease return on equity. - Interest on bonds is payable at maturity.

Bonds do not affect owner control.

Which of the following statements is not an advantage of bond financing? - Bonds can increase return on equity. - Bonds require interest payments and payment of par value. - Bonds do not affect owner control. - Interest on bonds is tax deductible.

Bonds require interest payments and payment of par value.

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 company issues $75,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $69,000 for the bonds, the issuer will record the sale with a debit to which of the following accounts?

Cash and Discount on Bonds Payable

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 Bond Payable $500,000; and credit to Cash $500,000. - Debit to Cash $500,000; debit to Interest Expense $300,000; and credit to Bond Payable $800,000. - Debit to Cash $500,000; and credit to Bond Payable $500,000.

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

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.) - Debit to Interest Expense for $3,000. - Debit to Interest Expense for $6,000. - Credit to Cash for $3,000. - Credit to Cash for $6,000.

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

A company issues $90,000 of 9%, 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/credit) ________ to bond payable in the amount of _______.

Debit; $90,000

Contract rate is less than the market rate

Discount

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

Indenture

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

Interest Expense

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 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? - Cash, $2,500 - Interest Payable, $5,000 - Interest Expense, $2,500 - Interest Expense, $5,000 - Cash, $5,000 - Interest Payable, $2,500

Interest Expense, $2,500

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

Par

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

Par

Contract rate is equal to market rate

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

Par value - discount on bonds payable

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

Par;Interest

Contract rate is greater than the market rate

Premium

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

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

Straight-line

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.

1000

Which of the following is a disadvantage of bond financing? - Bonds require payment of periodic interest and the par value. - Large bond issuances can decrease owner control. - Bonds can increase return on equity.

Bonds require payment of periodic interest and the par value.

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 first semi-annual interest payment with a credit to _____________ in the amount of $_________

Cash; 2,000

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

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $98,000 for the bonds, the issuer will record the sale with a (debit/credit) _________ debit, Incorrect Unavailable to Bonds Payable in the amount of $_____________

Credit; 100000

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 $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 $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

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

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:

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

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

Expense