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

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 $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 $_____________________.

Blank 1: Cash Blank 2: 100000

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 $_________________.

Blank 1: Cash Blank 2: 2000

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 $___________________.

Blank 1: Cash Blank 2: 75000

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)_____________ to Bonds Payable in the amount of $______________.

Blank 1: credit Blank 2: 100000

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)__________________ to Bonds Payable in the amount of $________________.

Blank 1: credit Blank 2: 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 $__________________.

Blank 1: credit Blank 2: 400000

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 $__________________.

Blank 1: debit Blank 2: 1000

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

Blank 1: indenture

The straight-line bond amortization method allocates an equal portion of the total bond ______________ ______________to each interest period.

Blank 1: interest Blank 2: expense

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.

Blank 1: 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 ___________________.

Blank 1: maturity

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

Blank 1: par

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

Blank 1: par

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

Blank 1: par Blank 2: interest

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

Blank 1: premium

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

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.

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

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

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

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

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

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

discount

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

expense

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

expense

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

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

interest expense

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 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

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

par

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

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

straight-line

Market rates help determine the selling price of bonds. Identify which scenarios should be matched together. Premium Discount Par

- Contract rate is greater than the market rate - Contract rate is less than the market rate - Contract rate is equal to market rate

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%

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

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

Par value - discount on bonds payable