Chapter 14: Bonds and Long-Term Debt
Adams Corporation's balance sheet reports $100 million in bonds payable. Felix Company who purchased some of Adams' bonds will report the bonds as
an investment
At the time of maturity, the repayment amount for bonds is equal to the:
face amount of the bonds
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
Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit
notes payable
effective interest rate
rate established when bonds are issued that maintains a constant value for interest expense as a percentage of bond carrying value in each interest period
Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the
effective interest rate
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
The mirror image a liability is an asset. The mirror image of investments in bonds is
Bonds payable
Otto Company purchases bonds with a face amount of $80,000 for $84,000. Which of the following journal entries would be correct?
Debt investment in bonds $80,000; debt premium on bond investment for $4,000; credit cash for $84,000
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
Effective interest method
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 standing of the issuer.
Amortization of bond discount results in the bond being valued on the balance sheet at the
Present value of the associated future cash flows
Although the interest on a bond is often stated as an annual rate, interest is frequently payable
Semiannually
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(n) _____.
discount
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at:
discount
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 can be bought back by the issuer state specified price prior to the bonds' maturity date are referred to as
Callable bonds
Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct?
Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased.
Otto Company purchases $200,000 face amount, 8% semi-annual 10-year binds when the market rate is 7%. The number of interest. Utilized to determine interest revenue earned on the investment is
20 periods
On January 1, 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
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.
Hatter Company's new bond issue with face amount of $7 million sells for $6.8 million. Which of the following facts may explain why the bonds sell at a discount?
Hatter Company's stated interest rate must be lower than that of competing companies in the bond market.
Which of the following are terms that can be used to refer to the periodic interest rate paid by bond issuers?
Nominal, Coupon, Stated rate
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
Interest on bonds typically is paid
Semiannually
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.
Which of the following are true regarding zero-coupon bonds?
Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.
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.
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt
outstanding during the interest period.
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(n) _____.
premium
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