Chapter 14 reading assigment

Generally, liabilities are valued at their fair market value. nominal amount. present value. net realizable value.

present value

Consistent with IFRS, if the fair value of convertible bonds for which no active market exists cannot be determined, the value of the bonds can be calculated based on the: present value of the bonds' cash using the stated interest rate residual value between issue price and fair value of the conversion feature face amount of the bonds plus interest present value of the bonds' cash flows using the market interest rate

present value of the bonds' cash flows using the market interest rate

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). $215,567 $183,777 $217,966 $200,000

$217,966

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 $320,000. accrue interest expense of $160,000. accrue interest expense of $80,000. not accrue any interest expense.

accrue interest expense of $80,000.

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. interest expense for $7,000. interest expense for $7,800.

bond discount for $800. Reason: (195,000 x 0.04) - ($200,000 x 0.035)

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit (Select all that apply.) bonds payable for $2,500,000. loss on conversion of bonds for $75,000. premium on bonds payable for $75,000.

bonds payable for $2,500,000. premium on bonds payable for $75,000.

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. only by calculating the exact issue price and comparing it to the 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. convertible exchangeable treasury callable

callable

A bond feature that aims at making the bonds more attractive to investors is the ____ feature. conversion call redeemable

conversion

Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ________ bonds

convertible

If a company can earn a return on borrowed funds in excess of the cost of borrowing, the funds the company achieves: low leverage. a positive return. favorable leverage. high leverage.

favorable leverage

Abby Corp. purchases a machine and signs a $20,000 note. The note requires periodic payments of 8% interest. The equipment would normally sell for $19,000 in cash. This implies that the company's implicit interest rate probably is equal to 8%. lower than 8%. higher than 8%.

higher than 8%.

Accounting for convertible bonds subsequent to issuance is the same as accounting for _____. bonds with detachable warrants non-convertible bonds common stock

non-convertible bonds

The primary purpose of the call feature associated with bonds is to allow investors to regain control over their invested funds. exchange the bonds for another type of financing source. protect the issuer against declining interest rates.

protect the issuer against declining interest rates.

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 liquidating secondary unsecured

subordinate

Margot wants to calculate the installment payment amount for a new installment notes payable of $200,000, which is due in ten years. Based on the interest rate, Margot determined that the applicable present value factor is 8.1109. Rounding to whole dollars, the installment payment amount is: $20,000 $24,658 $25,000 $26,452

$24, 658 Reason: $200,000/8.1109

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). $100,000 $107,000 $115,589 $81,307

$115,589 Reason: (100,000 x 0.61027) + (3,500 x 15.58916)

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 10 periods. 20 periods. 5 periods.

20 periods 10*2=20

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on shareholders' equity expressed as a percentage is: 27.78%. 33.33%. 12.50%. 13.75%.

27.78% Reason: 50/(400 - 220)

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 $20,000 prepaid interest of $20,000 prepaid interest of $10,000 interest expense of $10,000.

interest expense of $10,000.

Which of the following costs are associated with issuing both publicly and privately placed bonds? (Select all that apply.) legal fees accounting fees NYSE filing fees SEC filing fees

legal fees accounting fees

A common reason for redeeming a bond prior to its maturity date is that market interest rates decreased. the market price of bonds decreased.

market interest rates decreased.

Under both US GAAP and IFRS, if the fair value of bonds is not readily determinable, the fair value may be calculated as the present value of the future cash flows using the ________ ________ of interest

market rate

Bonds that do not include a call provision may be repurchased on the open market cannot be retired prior to the maturity date must be outstanding until maturity

may be repurchased on the open market

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. improve net income. be easier to apply. reduce reporting costs.

mislead investors

Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds. indenture debenture mortgage real estate

mortgage

The return on assets is calculated by dividing ________ ____________ by total assets

net income

The return on shareholders' equity is calculated by dividing _____ _____ by total shareholder's equity

net income

Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit bonds payable accounts payable notes payable cash

notes payable

Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt: outstanding during the interest period. referred to as the face amount. that has to be repaid at maturity. referred to as the par value.

outstanding during the interest period.

Zero-coupon bonds typically issue at a deep discount because they: offer a high interest rate pay no interest offer a low interest rate are high risk bonds

pay no interest

A bond that sells for more than its face amount is sold at a ______

premium

A company that recognizes a long-term notes payable has signed the legal document referred to as a _________ note

promissory

Correctly match the type of disclosure with the type of long-term liability for which the disclosure likely would be made. Bonds payable - publicly traded bonds noted not traded on market exchanges Present value of principal and interest payments Fair value

Bonds payable - publicly traded bonds : Fair value noted not traded on market exchanges : Present value of principal and interest payments

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) Factoring bonds through a licensed factor. Including a call feature when the bonds are issued. Purchasing bonds on the open market.

Including a call feature when the bonds are issued. Purchasing bonds on the open market.

Which of the following is correct regarding the default of a bond issuer? A class action suit must be filed by the trustees as well as the individual bondholders. The trustee holding the indenture can sue the issuer on behalf of the bondholders. Each bondholder must sue the issuing company for payment.

The trustee holding the indenture can sue the issuer on behalf of the bondholders.

Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.) face amount stated rate market rate carrying value

face amount stated rate

At the time of maturity, the repayment amount for bonds is equal to the: face amount plus unamortized premium face amount less unamortized discount face amount of the bonds

face amount of the bonds

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 callable bonds serial bonds graded bonds step bonds

serial bonds

Convertible bonds are retired when bondholders choose to convert them into shares of ___________

stock

Bonds that pay no interest and instead issue at a deep discount are commonly referred to as _____ coupon bond

zero

Which of the following statements is correct? Bonds sell for their face amount if they are issued near the original interest date. Bonds may sell below, above, or at their face amount. Bonds always sell for their face amount.

Bonds may sell below, above, or at their face amount.

Which of the following information relating to financial instruments must be disclosed either on the face of the balance sheet, or in the notes to the financial statements? The original issue price Fair value The names of holders

Fair value

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 1 period. 15 periods. 30 periods.

30 periods

The phrase used to indicate that accounting and reporting should reflect the underlying economic essence of a transaction is _________ over __________

substance; form

When we multiply the face amount of bonds with the stated interest rate, we calculate interest expense or revenue the amount of interest paid

the amount of interest paid

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to: reacquire the bonds when interest rates fall. repay a certain amount at a specific date. repay a certain amount at a date to be determined in the future. reacquire the bonds when interest rates rise. pay interest if the company is profitable.

repay a certain amount at a specific date.

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 notes payable for $12,000. interest expense for $24,000. interest expense for $12,000. notes payable for $24,000.

interest expense for $12,000.

Evergreen Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 20 shares of common stock. At the bond issue date, the company's common shares trade for $55 per share. At the date of issue, Evergreen should recognize an addition to equity of $0. $50,000. $50,000,000. $1,000,000.

$1,000,000. Reason: (55 - 50) x 10,000 x 20 shares

The debt equity ratio can provide information regarding a company's risk that it will be unable to pay its debt when due. This is called the company's ___________ risk

default

Installment notes typically involve the purchase of assets and (Select all that apply.) require installment payments over time. require periodic payments of interest and payment of the loan at maturity. defer interest payments until maturity. periodic payments include principal and interest.

require installment payments over time. periodic payments include principal and interest.

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: interest rate stated on the note value of the asset or service exchanged return on the company's debt return on the company's equity

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 maturity amount of the note. interest rate stated in the note. value of the purchased equipment.

value of the purchased equipment

Mitchell's investment in convertible bonds has a net book value of $1.4 million when Mitchell converts the bonds to common stock. The fair value of the common stock is $1.5 million. Mitchell should recognize its investment in common stock at $1.45 million $1.5 million $1.4 million $100,000

$1.4 million

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 $1,000,000 $1,400,000

$675,560 Reason: 0.67556 x 1 million

The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is 1.27. 1.47. 1.32. 0.79.

1.32 Reason: ($100 + $150)/($120 + $50 + $20)

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is 15%. 13.75%. 12.5%.

12.5%. Reason: $50/$400 = 12.5%

Which of the following best describes the essence of the concept "substance over form"? Accounting for a transaction is primarily determined by the outward appearance of the transaction. Accounting for a transaction is primarily determined by the written contract. Accounting for a transaction is primarily determined by the essence of the transaction.

Accounting for a transaction is primarily determined by the essence of the transaction.

This ratio may provide information about a company's default risk. Debt to equity Return rate Asset turn over Profit margin

Debt to equity

Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? They receive payment after secured debt has been satisfied. They receive payment only after other specific debt has been satisfied. They are paid at the same time that other specific debt is satisfied.

They receive payment only after other specific debt has been satisfied.

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.) To sell the bonds at a higher price. To use a medium of exchange in mergers and acquisitions. To provide investors with a means for diversifying investment risk. To enable smaller or debt-heavy companies to gain access to the bond market.

To sell the bonds at a higher price. To use a medium of exchange in mergers and acquisitions. To enable smaller or debt-heavy companies to gain access to the bond market.

True or false: The implied interest rate may be different from the stated interest rate of a loan.

True

True or false: The interest rate stated in a note is typically equal to the market rate.

True

Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue? creditworthiness of the issuer reputation of the trustee who holds the indenture frequency of scheduled interest payments

creditworthiness of the issuer

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 decrease by $709. increase by $1,418 not change. increase by $709.

increase by $709.

The specific promises made to bondholders are described in a document called a bond _________

indenture

The issue price of bonds is calculated as the ____ value of all the cash flows required of the bonds.

present

Today, most bonds issued are bearer bonds registered bonds coupon bonds

registered 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

remaining

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 debit to premium on bonds payable debit to discount on bonds payable credit to premium on bonds payable

credit to discount on bonds payable

The fundamental reason why companies issue convertible bonds is to ward off hostile takeovers. improve their debt equity ratio. make the bonds more attractive to investors.

make the bonds more attractive to investors.

The following selected information pertains to Wilson Company. Net income: $50; taxes: $20; interest: $10. The company's times interest earned ratio is 7. 5. 8. 6.

8 Reason: ($50 + $20 + $10)/$10

On January 2, 20X1, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and December 31. Yves decides to utilize the straight-line method of amortization. On December 31, 20X1, Yves should credit the "discount on bonds payable" account for $10,000. $500. $1,000.

$1,000 Reason: Discount = $500,000 x (1-.98)/10

Gruenwald Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 25 shares of common stock. At the bond issue date, the company's common shares trade for $44 per share. At the date of issue, Gruenwald should recognize an addition to equity of: $44,000. $0. $44,000,000. $1,000,000.

$1,000,000. Reason: $1000/25 shares = $40 per share conversion price (44 - 40) x 10,000 x 25 shares

The interest rate on notes payable typically is equal to the ____ rate. market short-term borrowing prime credit

market

On January 2, 20X1, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and December 31. Yves decides to utilize the straight-line method of amortization. On December 31, 20X1, Yves should debit interest expense for $14,000. $15,000. $16,000.

$16,000 Reason: 15,000 + 1,000 amortization

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). $200,000 $191,684 $167,199 $143,811

$191,684 Reason: (200,000 x 0.70892) + (6,000 x 8.31661)

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should recognize this conversion by crediting common stock for $10,300,000 $2,575,000 $2,500,000

$2,575,000 Reason: (10,000 x 1,000 + 300,000) x 25%

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? $400,000 $223,358 $535,290 $298,904

$298,904

Which of the following statements regarding convertible bonds subsequent to issuance is correct? Accounting is the same as for nonconvertible bonds. Accounting is different than for nonconvertible bonds.

Accounting is the same as for nonconvertible bonds.

Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct? Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000. Debit investment in bonds for $80,000; credit cash for $80,000. Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.

Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.

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 must have issued its bonds after the first interest payment was due. Hatter Company's stated interest rate must be lower than that of competing companies in the bond market. Hatter Company's reputation must have been recently impaired.

Hatter Company's stated interest rate must be lower than that of competing companies in the bond market.

Which of the following is correct regarding the effective interest method? Interest paid is equal to the effective interest rate multiplied by the maturity value. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. Interest recorded is equal to the effective interest rate multiplied by the issue price.

Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.

What are the advantages of financing with long-term debt? (Select all that apply.) It decreases the current ratio. It is less risky than financing with equity. Interest is tax deductible. A company may earn a greater return than the cost of borrowing the funds.

Interest is tax deductible. A company may earn a greater return than the cost of borrowing the funds.

Which of the following is true regarding a debenture bond? It is secured by the faith and credit of the issuer. It is secured by an outside third party. It is secured by the issuer's long-term assets.

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

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 6 months of interest. Peter should recognize 3 months of interest. Peter should not recognize any interest until April 1, 20X2.

Peter should recognize 3 months of interest.

Which ratio indicates profitability without regard to how resources are financed? Debt to equity ratio Profit margin Gross profit Rate of return on assets

Rate of return on assets

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond consistent with IFRS? The value of the conversion feature is not recognized separately. The value of the conversion feature is recognized as net income. The value of the conversion feature is recognized as equity.

The value of the conversion feature is recognized as equity.

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds? The warrants give the holder the option to purchase additional bonds at a favorable price. The warrants can be separated from the bonds. Bonds with detachable warrants typically sell for less than convertible bonds.

The warrants can be separated from the bonds.

Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) The warrants can be sold by the bondholder to another investor. The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock. The warrants can be exercised separately from the bonds.

The warrants can be sold by the bondholder to another investor. The warrants can be exercised separately from the bonds.

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. They are more costly to issue than publicly offered 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 an estimated amount. They obligate the issuing company to repay the bonds when interest rates increase. They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds when market interest rates decrease.

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

A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n) debenture bond serial bond secured bond indenture bond

debenture bond

A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at: face amount a discount a premium

a discount

Periodic payments on installment notes typically include a portion that reflects interest at the effective interest rate. a portion that reflects interest at the stated interest rate. a portion that reduces the outstanding loan balance. installment fees.

a portion that reflects interest at the effective interest rate. a portion that reduces the outstanding loan balance.

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. accrue interest expense of $160,000. not accrue any interest expense. accrue interest expense of $320,000.

accrue interest expense of $80,000. Reason: 4,000,000*.08*(3/12)

When an accounting period ends between interest dates, interest should be: accrued since the last interest date ignored until the next interest payment date prepaid

accrued since the last interest date

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by debiting (Select all that apply.) bonds payable for $5 million. additional paid-in capital for $150,000. premium on bonds payable for $150,000. loss on bond conversion for $1,100,000.

bonds payable for $5 million. premium on bonds payable for $150,000. loss on bond conversion for $1,100,000.

Bond issue costs typically are incurred related to: privately placed bonds only publicly sold bonds only both privately placed and publicly sold bonds

both privately placed and publicly sold bonds

One of the advantages associated with bonds is that a relatively large amount of debt can be obtained from a single source. broken into small portions. financed over a short-term horizon.

broken into small portions.

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 March 30, 20X2, Snorkel should (Select all that apply.) not record any interest expense. debit interest payable $80,000 credit cash $160,000 credit interest payable $160,000 debit interest expense $80,000.

debit interest payable $80,000 credit cash $160,000 debit interest expense $80,000.

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 record what journal entry? (Select all that apply.) debit investment in bonds $200,000. credit bonds payable $200,000 credit cash $200,000 debit cash $200,000 credit investment in bonds $200,000

debit investment in bonds $200,000. credit cash $200,000

Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the debt ratio. debt yield ratio. debt to equity ratio. equity yield ratio.

debt to equity ratio

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

effective interest

Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the: current rate of return effective interest rate stated interest rate coupon rate

effective interest rate

The creditworthiness of the company issuing the bonds will affect the company's stated interest rate effective interest rate ability to redeem its outstanding bond issue return on equity

effective interest rate

The issue price of bonds is calculated as the _____ value of all the cash flows required of the bonds.

present

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 Multiple choice question. $1,470 $2,500 $0 $2,940 $5,000

$1,470 Reason: (98,000 x.06) x 3/12

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Margarita, Inc., purchased 2,500 of the bonds and converts them after 2 years. At that time, the balance in the premium on bond investment is $75,000. Margarita should recognize this conversion by debiting investment in common stock for $2,425,000. $2,575,000 $2,500,000.

$2,575,000 Reason: (2,500 x 1,000) + 75,000

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. $260,000. $212,000.

$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. $212,000. $260,000.

$200,000

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) $6,709 $2,875. $3,354. $3,000.

$3,354. PV: 95,842; 95,842*.035

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, First Rate Bank should debit "notes receivable" for $300,000. $324,000. $372,000.

$300,000

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 Multiple choice question. $125. $709 $354. Reason: (95,842 x 0.035) - 3,000 $0. Reason: (95,842 x 0.035) - 3,000

$354 Reason: PV: 95,842; (95,842*.035)-(100,000*(.06/2))

At the beginning of the current year, Wagner Company purchases equipment and signs an installment note requiring 6 annual equal payments at the end of each year. The equipment would sell for $200,000 if the company paid cash. The company's effective borrowing rate is 7%. Wagner must make annual installment payments of (use the tables in your textbook and round to the nearest dollar) $41,959. $95,331. $33,333.

$41,959. Reason: 200,000/4.76654

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: $6 million $5 million $5.2 million

$5 million

On January 2, MLK Corp. issued $10 million of 8% bonds at 104. Each $1,000 bond is accompanied by 25 stock warrants. Each warrant permits the holder to purchase one share of no-par common stock for $20. Immediately after issuance, the warrants were listed on the stock exchange for $2 each. MLK should recognize equity from the sale of bonds of $0. $1,150,000. $400,000. $500,000.

$500,000. Reason: $2 x 25 x 10,000

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 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) $6,000. $6,709. $5,751. $13,418

$6,709 PV=191,684; 191,648 x 0.035 (7% semiannually)

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 $249. $0. $709. $1,418

$709 200,000*(.06/2)=6,000 191,684*(.07/2)=6,709 6,709-6,000=709

Smith Company purchases new machinery by signing an $80,000 face amount, 2-year note. The market interest rate is 6%, but no interest payment is due during the life of the note. Smith should record the machinery at $71,200. $84,800 $80,000.

$71,200. Reason: 2 years, 6% factor is .89000 80,000 x 0.89

Small Company purchases new machinery by signing a $100,000 face amount 2-year note. The market interest rate is 8%, but no interest is due over the life of the note. Small should recognize a net note payable of $100,000. $108,000 $85,734.

$85,734 Reason: 100,000 x 0.85734

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). $100,000 $95,944 $69,804 $82,032

$95,944 Reason: (100,000 x 0.67556) + (3,500 x 8.11090)

Which of the following correctly describes a bond indenture? The relationship between the effective interest and the stated interest rates. A document detailing the promises made by the bond issuer. The portfolio of bonds that are issued during a particular fiscal period.

A document detailing the promises made by the bond issuer.

The following highlights differences between loans with the principal due at maturity and installment loans. Correctly match each characteristic with the type of loan it applies to. Installment loan Loan with lump-sum principal payment at maturity Periodic payment includes interest and a portion that reduces the outstanding loan. Periodic payment does not include a portion of principal.

Installment loan : Periodic payment includes interest and a portion that reduces the outstanding loan. Loan with lump-sum principal payment at maturity: Periodic payment does not include a portion of principal.

The following highlights differences between loans with the principal due at maturity and installment loans. Correctly match each characteristic with the type of loan it applies to. Installment loan Loan with lump sum principal payment at maturity The loan balance reflects the face amount at the date of maturity. The loan balance is reduced over time and reaches zero at the end of the loan term.

Installment loan : The loan balance is reduced over time and reaches zero at the end of the loan term. Loan with lump sum principal payment at maturity : The loan balance reflects the face amount at the date of maturity.

Which of the following represent the typical characteristics of liabilities? (Select all that apply.) Future cash payments cannot be measured. Interest accrues as time passes on long-term liabilities. Future cash payments are certain or estimable. The requirement of future cash payments.

Interest accrues as time passes on long-term liabilities. Future cash payments are certain or estimable. The requirement of future cash payments.

Which of the following is correct regarding the return on assets? It indicates profitability without regard to how resources are financed. It indicates profitability on borrowed funds. It indicates profitability on the company's financial assets. It indicates profitability earned on nonfinancial assets.

It indicates profitability without regard to how resources are financed.

Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply.) It indicates the likelihood the loan will be paid back at maturity. It indicates the company's ability to pay its cost of borrowing. It indicates the leverage of the company. It indicates the company's margin of safety in terms of paying its fixed interest.

It indicates the company's ability to pay its cost of borrowing. It indicates the company's margin of safety in terms of paying its fixed interest.

Which of the following is correct regarding the rate of return on shareholders' equity? It indicates the effectiveness of employing resources provided by owners. It indicates profitability earned on nonfinancial assets. It indicates profitability without regard to how resources are financed. It indicates profitability on the company's financial assets.

It indicates the effectiveness of employing resources provided by owners.

Which of the following statements regarding the times interest earned ratio is correct? It indicates the margin of safety provided to creditors. It provides assurance that the loan will be paid back at maturity.

It indicates the margin of safety provided to creditors.

Which of the following statements regarding the times interest earned ratio is correct? It provides assurance that the loan will be paid back at maturity. It indicates the margin of safety provided to creditors.

It indicates the margin of safety provided to creditors.

Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? It is impractical for the issuer to enter into an agreement with each bondholder. Bond issuers are not permitted to enter into separate agreements with bondholders. A bank must guarantee a new bond issue.

It is impractical for the issuer to enter into an agreement with each bondholder.

The times interest earned ratio is calculated as Interest expense divided by income before interest and taxes Interest expense divided by net income Net income plus interest plus taxes divided by interest Net income divided by interest expense

Net income plus interest plus taxes divided by interest

This ratio provides information about a company's effectiveness of employing resources provided by owners. Profit ratio Rate of return on assets Rate of return on shareholders' equity Debt to equity ratio

Rate of return on shareholders' equity

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? Increase the cash proceeds and increase the discount and debt issue costs account Reduce the cash proceeds and increase the discount and debt issue costs account Reduce the cash proceeds and increase the bonds payable account

Reduce the cash proceeds and increase the discount and debt issue costs account

Correctly match the type of commonly issued bonds with the time period during which they were most popular. Registered bond Bearer bond Present Day Years ago

Registered bond: Present day Bearer bond: years ago

Private placements of bonds typically incur lower bond issue costs because they are not subject to financial reporting. any regulation. SEC registration.

SEC registration.

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums? The method can be used if a company irrevocably elects the method on the bond issue date. The method is not permitted under current U.S. GAAP. The method can only be used if it produces results that are not materially different from those produced by the effective interest method.

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 an advantage of issuing bonds? The total loan is broken into many parts, making it easier to find lenders. The fees associated with obtaining the funds are typically lower than for other large loans. The interest rate on bonds is always lower than the rate on bank loans.

The total loan is broken into many parts, making it easier to find lenders.

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? The value of the conversion feature is not recognized separately. The value of the conversion feature is recognized as additional paid-in capital.

The value of the conversion feature is not recognized separately.

For bonds issued with detachable stock warrants, the issue price is: credited to equity only allocated between debt and equity allocated between debt and gain credited to bonds payable only

allocated between debt and equity

The difference between the effective interest and the interest paid represents the time value of money. amortization of a discount or premium. a gain or loss due to changes in market interest rates.

amortization of a discount or premium.

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by crediting gain on bond conversion for $1,100,000. common stock for $6,250,000. common stock for $5,150,000

common stock for $6,250,000. Reason: 25 x 5,000 x 50

Bonds that permit bond holders to exchange their bonds for common stock are referred to as _____ bonds. treasury exchangeable stock redeemable convertible

convertible

On December 31, 20X1, Werner Inc. has $1 million face amount, 6% bonds outstanding. The bonds were issued at a discount and pay interest semi-annually on March 31 and September 30. On 3/31/X2, Werner Inc. should: not make any entry related to the bonds. credit interest payable credit cash credit discount on bonds payable debit interest payable debit interest expense debit discount on bonds payable

credit cash credit discount on bonds payable debit interest payable debit interest expense

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 debit discount on bonds payable for $709. credit gain on bonds payable for $709. debit discount on bonds payable for $1,418. debit loss on bonds payable for $709. debit loss on bonds payable for $1,418. credit discount on bonds payable for $709. credit discount on bonds payable for $1,418. credit gain on bonds payable for $1,418.

credit discount on bonds payable for $709.

Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. Consistent with IFRS, on the date of issuance Wasser should Multiple choice question. credit premium on bonds payable for $10,000. credit equity-conversion option for $10,000. not recognize any premium or additional equity.

credit equity-conversion option for $10,000.

Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should credit additional paid-in capital—convertible bonds for $10,000. credit premium on bonds payable for $10,000. not recognize any premium or additional equity.

credit premium on bonds payable for $10,000.

Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In Kordel's statement of cash flows, this payment should be reported as (Select all that apply.) financing activity outflow of $15,200. financing activity outflow of $6,200. operating activity outflow of $9,000. operating activity outflow of $15,200.

financing activity outflow of $6,200. operating activity outflow of $9,000.

In situations when the interest rate is not readily apparent, the rate used to measure and account for the transaction should be the ___ interest rate. stated going implicit prime

implicit

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 decrease by $354. increase by $354. decrease by $709. not change. increase by $709.

increase by $354.

A(n) _______ bond is backed by a lien on specified real estate owned by the issuer

mortgage

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 accounts payable for $324,000. notes payable for $300,000. accounts payable for $300,000. notes payable for $372,000.

notes payable for $300,000.

In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n) financing activity. investing activity. operating activity.

operating activity

In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n) investing activity. operating activity. financing activity.

operating activity

Using the effective interest method, the bond issuer calculates interest expense based on the: outstanding balance of the bonds expected future value of the bonds face amount of the bonds

outstanding balance of the bonds

Waldo Inc. purchases equipment and signs a note in exchange. The note specifies an interest rate of 8%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 6%. On the day the note is signed, the note should be recognized at the: present value of the cash payments using a 6% interest rate. present value of the cash payments using a 8% interest rate. the sum of the cash paid over the life of the note.

present value of the cash payments using a 6% interest rate.

Gruenwald Corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at the present value of the cash payments using a 7% interest rate. the sum of the cash paid over the life of the note. present value of the cash payments using a 12% interest rate.

present value of the cash payments using a 7% interest rate.

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 current rates. present value of the future cash flows using original rates. maturity value plus accrued interest payable.

present value of the future cash flows using original rates.

Bond issue costs: reduce the cash proceeds from the issuance of debt. do not affect the cash proceeds from the issuance of debt. increase the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing. decrease the effective interest rate of borrowing.

reduce the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing.

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 ____. face amount; estimated sales price stated interest rate; market interest rate expected return; estimated return

stated interest rate; market interest rate