Chapter 14 ACCT 311
Milky Company's 5%, $100,000 face amount bonds have a carrying value of $98,000. When the bonds were issued two years ago, the effective interest rate was 6%. The bonds pay interest semi-annually on April 1 and October 1. In the December 31 adjusting entry, Milky Company should recognize interest expense of:
$1,470
On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars).
$115,589
On January 2, 20X1, 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 market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$191,684
On January 1, 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.
On January 1, 20X1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds payable of:
$200,000.
On January 2, 20X1, 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 market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$217,966
Orange Company issues zero-coupon, 5-year bonds with a face amount of $400,000 to yield 6%. At what price did the bonds sell?
$298,904
On January 2, 20X1, 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, 20X1, will be equal to (round to the nearest full dollar)
$3,354.
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of:
$354.
During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was:
$400
Glueck Inc. issues $5 million face amount bonds at $5.2 million; interest of $100,000 is paid semi-annually for five years. At the maturity date, Glueck will pay bond investors:
$5 million
On January 2, 20X1, 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%. Effective interest recognized on June 30, 20X1, will be equal to (round to whole dollars)
$6,709.
Mauser Company issues $1 million face amount, zero-coupon 10-year bonds to yield 4% interest. At the date of issue, what issue price will Mauser receive for its bonds?
$675,560
On January 2, 20X1, 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 market interest rate is 7%. The bond issues for $191,684. On June 30, the company should recognize a discount amortization of:
$709.
On January 2, 20X1, Schneider Company issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 8%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$95,944
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ___ coupon bonds.
0
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ___ coupon bonds. (Enter only one word.)
0
Otto Company purchases $200,000 face amount, 8% semi-annual 10-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is:
20 periods.
Emil Company purchases $400,000 face amount, 8% semi-annual 15-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is:
30 periods
Which of the following statements is correct?
Bonds may sell below, above, or at their face amount.
Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct?
Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.
Recording interest each period as the _____ effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the method. (Enter only one word per blank.)
Effective interest
As a result of applying the effective interest method, the carrying value of bonds is equal to the present value of the cash flows. (Enter only one word.)
Future
Which of the following represent the typical characteristics of liabilities? (Select all that apply.)
Future cash payments are certain or estimable. The requirement of future cash payments. Interest accrues as time passes on long-term liabilities.
Which of the following is correct regarding the effective interest method?
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit of the issuer.
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.
Periodic interest is incurred
Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue?
Peter should recognize 3 months of interest.
On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for?
Reduce the cash proceeds and increase the discount and debt issue costs account
Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.)
Represents the rights of the bond holders Holds the bond indenture Appointed by bond issuer
Private placements of bonds typically incur lower bond issue costs because they are not subject to:
SEC registration.
Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium?
The company's stated interest rate must be higher than that of other competing companies.
Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?
The method can only be used if it produces results that are not materially different from those produced by the effective interest method.
Which of the following is correct regarding the default of a bond issuer?
The trustee holding the indenture can sue the issuer on behalf of the bondholders.
Which of the following statements is correct regarding the cost associated with issuing privately placed corporate bonds?
They are less costly to issue than publicly offered bonds.
Which of the following are correct regarding bonds? (Select all that apply.)
They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds at a specific date.
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy?
They receive payment only after other specific debt has been satisfied.
True or false: The interest rate stated in a note is typically equal to the market rate.
True
Which of the following are true regarding zero-coupon bonds? (Select all that apply.)
Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at:
a discount
On October 1, 20X1, Snorkel Company issues $4 million, 8% interest bonds at face amount. Interest is payable on March 30 and Sept. 30. On 12/31/X1, the company's balance sheet date, Snorkel should:
accrue interest expense of $80,000.
When an accounting period ends between interest dates, interest should be:
accrued since the last interest date
The difference between the effective interest and the interest paid represents:
amortization of a discount or premium.
On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on January 1 and July 1. On December 31, 20X1, the company should credit:
bond discount for $800.
Callable bonds can be redeemed at the choice of the:
bond issuer.
The most common type of corporate debt is:
bonds.
One of the advantages associated with bonds is that a relatively large amount of debt can be:
broken into small portions.
Margot, an accounting student, tries to determine whether a bond sells at a premium, discount, or face amount. Margot can determine whether the bond sells at a premium, discount, or face amount:
by comparing the effective and stated interest rates.
Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as ____ bonds.
callable
Bonds that permit bond holders to exchange their bonds for common stock are referred to as _____ bonds.
convertible
On January 1, 20X1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should record what journal entry? (Select all that apply.)
credit cash $200,000 debit investment in bonds $200,000.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. The company should also:
credit discount on bonds payable for $709.
For the current interest period, Jones Corporation's accountant correctly recognized interest expense of $7,350 relating to Jones' bonds and paid $7,000 in interest to bond holders. The journal entry recording the interest also must have included a:
credit to discount on bonds payable
Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue?
creditworthiness of the issuer
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n):
debenture bond
A bond that sells for less than its face amount is sold at a:
discount
Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the:
effective interest rate
The creditworthiness of the company issuing the bonds will affect the company's:
effective interest rate
At the time of maturity, the repayment amount for bonds is equal to the:
face amount of the bonds
The amount of interest paid on bonds is calculated by multiplying ______ of the bonds with the ____ rate.
face amount; stated
On January 1, 20X1, Water 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 and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will:
increase by $354.
On January 1, 20X1, Water 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 and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will:
increase by $709.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will:
increase by $709.
Bond issue costs:
increase the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.
The specific promises made to bondholders are described in a document called a bond:
indenture
The specific promises made to bondholders are described in a document referred to as a bond:
indenture
On January 1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On December 31, Smite Corp. should debit:
interest expense for $12,000.
On January 1, Greenbaum Corp. borrows $500,000 cash from First National Bank and issues a 2-year, $500,000 promissory note. Interest of $10,000 is payable semi-annually on June 30 and December 31. On December 31, Greenbaum Corp. should recognize:
interest expense of $10,000.
The interest rate on notes payable typically is equal to the ____ rate.
market
A common reason for redeeming a bond prior to its maturity date is that:
market interest rates decreased.
The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to:
mislead investors.
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds.
mortgage
A(n) ____ bond is backed by a lien on specified real estate owned by the issuer. (Enter only one word.)
mortgage or secured
On January 1, 20X1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On the date of issuance, Smite Corp. should credit:
notes payable for $300,000.
On January 1, 20X1, Greenbaum Corp. borrows $500,000 cash from First National Bank and issues a 2-year, $500,000 promissory note. Interest of $10,000 is payable semi-annually on June 30 and December 31. On the date of issuance, Greenbaum Corp. should credit:
notes payable for $500,000.
Schulz Company borrows cash from a bank and signs a promissory note. The bank should record:
notes receivable
Using the effective interest method, the bond issuer calculates interest expense based on the:
outstanding balance of the bonds
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt:
outstanding during the interest period.
A bond investor who applies the effective interest method calculates interest revenue based on the _____ balance of the bonds times the _____ interest rate.
outstanding; effective
Zero-coupon bonds typically issue at a deep discount because they:
pay no interest
A bond that sells for more than its face amount is sold at a:
premium
The issue price of bonds is calculated as the _____ value of all the cash flows required of the bonds.
present
Amortization of bond discounts results in the bond being valued on the balance sheet at the:
present value of the associated future cash flows.
Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the:
present value of the future cash flows using original rates.
The issue price of a bond is always equal to the:
present value of the future cash flows.
Generally, liabilities are valued at their:
present value.
If a company sells its entire bond issue to a a single investor, the sale is referred to as a:
private placement.
A company that recognizes a long-term notes payable has signed the legal document referred to as a ___ note.
promissory
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to:
repay a certain amount at a specific date.
Bonds that retire in installments during all or part of the life of the bond issue are called ___ bonds.
serial
Bonds that retire in installments during all or part of the life of the bond issue are called ____ bonds.
serial
Bonds that systematically mature over a succession of years are referred to as:
serial bonds
Jennifer, an Intermediate Accounting student, wants to determine whether a particular bond issue will sell at face amount, a premium, or discount without calculating the actual issue price. Jennifer should compare the ____ and the ____.
stated interest rate; market interest rate
Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.)
stated rate face amount
Convertible bonds are retired when bondholders choose to convert them into shares of:
stock
Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as:
subordinate
Bond holders who are not entitled to receive any liquidation payments until claims of:
subordinate
When we multiply the face amount of bonds with the stated interest rate, we calculate:
the amount of interest paid
If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the:
value of the asset or service exchanged
Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the:
value of the purchased equipment.
