Chapter 9

The rate of interest printed on the face of a bond is referred to as the

stated interest rate

The price of a bond includes

the present value of the face amount plus the present value of the periodic interest payments

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include

DEBT Cash CREDIT Bonds payable

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price?

The issue price will be above the bond's face value.

how a note payable due in monthly installments over two years would be reported in the balance sheet?

The portion of the note payable due over the next year would be reported as a current liability, and the portion due in more than one year would be reported as a long-term liability.

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$88,699 Reason: (5.65022 x $10,000) + (0.32197 x $100,000) = $88,699

Bonds will be issued at a premium if the stated interest rate is

greater than the market interest rate.

Mann Inc. issues $100,000 bonds at face amount. The bonds pay interest of 6%. Berkely Inc., a company with comparable risk, issues $100,000 bonds, paying 5% interest for $98,000.

Both bonds yield a return of 6% to investors.

Making periodic payments on an installment note payable will affect which of the following accounts reported in the income statement?

Interest Expense.

Periodic payments on installment notes typically include

a portion that reduces the outstanding loan balance. a portion that reflects interest.

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at

a premium.

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:

long-term liabilities

lease

is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

Bonds may be retired at

maturity or retired early.

When a corporation repurchases its bonds from the bondholders, the corporation

retires the bonds

For a bond issued at a discount, the stated interest rate will be ____________, than its yield or return earned

LESS

Bonds

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

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes

a CREDIT to Interest payable of $500 a DEBIT to Interest expense of $500

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes

a CREDIT to Interest payable of $500 a DEBT to Interest expense of $500

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 7%, the bonds will issue at

A DISCOUNT

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes

a DEBIT to Interest expense of $6,000 a CREDIT to Cash of $6,000

During the year, a company borrows cash by issuing a note payable that is due in monthly installments over two years and has a stated interest rate. Which of the following is recorded at the time the note is issued?

DEBIT Cash CREDIT Notes Payable.

On January 1, year 1, Ziegler issued 5-year bonds with a stated rate of 8% and a face amount of $100,000. The bonds pay interest semiannually. The market rate of interest was 10%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$92,278

The two types of financing are

1. debt financing 2. equity financing

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

A CREDIT to bonds payable for $100,000 A DEBIT to discount on bonds payable for $2,000

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

A DEBIT to discount on bonds payable for $2,000 A CREDIT to bonds payable for $100,000

With each payment on an installment note payable

A portion of the payment is recorded as a reduction in Notes Payable and a portion is recorded as Interest Expense.

If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a

DEBIT to Cash of $100,000 CREDIT to Bonds payable of $100,000.

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance of the bonds should include debit(s) to:

Discount on bonds payable for $2,000 Cash for $98,000

True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.

False (The stated rate is not always equal to the market rate of interest.)

market interest rate

The true interest rate used by investors to value a bond issue

A corporation that wishes to borrow from the general public rather than a bank will issue

bonds

Loans requiring periodic payments of interest and principle are referred to as

installment notes

The market rate of interest

is an implied rate based on the price investors pay to purchase a bond.

Financing with debt

require borrowing money that must be repaid.

financing with equity

require issuing shares of stock.

Most corporate bonds pays interest

semiannually

stated rate of interest is used

to compute the cash interest paid to bondholders.