Chapter 9 - Financial Accounting

The Discount on Bonds Payable account is classified as a(n)

contra-liability

When bonds are issued at a premium, the carrying value of the debt ____ over time

decreases

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

lease

Werner issues bonds at a discount. The related Discount account should be classified as a(n)

contra-liability

Common terms used for the market interest rate are:

yield rate and effective interest rate

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate

Which of the following information is typically shown in a bond amortization schedule?

interest expense, cash paid, carrying value of the bonds

The _____ rate of interest is an implied rate based on the price investors pay to purchase a bond

market

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880. (50,000-5120+4000)

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:

$8600

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a premium. At end of the current fiscal period, the balance of premium on bonds payable is $1,200.The balance sheet presentation of Cabot's bonds should include:

Plus premium on bonds payable of $1,200 Bonds payable of $100,000

If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?

A credit to Premium on Bonds Payable of $10,000 A debit to Cash of $110,000. A credit to Bonds payable of $100,000

The ____ rate of interest is used to compute the cash interest paid to bondholders.

nominal

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

nominal

The _____ rate of interest on a bond is the interest rate printed on the bond, whereas the _____ rate of interest is the current rate of interest being paid on investments with similar characteristics.

nominal, market

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?

the cash paid each payment period, the carrying value of the note at the end of the period, interest expense based on the beginning period carrying value and the effective rate of the loan, the decrease in the carrying value of the note

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at

a premium

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:

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

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:

$195,500

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a premium. At the end of the current fiscal period, the balance of premium on bonds payable is $4,500. The liability reported on Omar's balance sheet should be:

$204,500

The journal entry to recognize the signing of an installment notes payable includes:

Debit cash, credit note payable

Which of the following is true regarding a debenture bond?

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

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 and 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. 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 ______.

credit to cash for $6,000 and debit to interest expense for $6,000

Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n) _____ bond

debenture

The journal entry to recognize the signing of an installment notes payable includes

debit cash, credit note payable

The two types of financing are

debt and equity

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

installment

The terms "effective interest rate" and "yield rate" refer to the ____ interest rate

market

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

note payable for $1,120 and interest expense for $4,000

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 and credit to bonds payable for $100,000

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a discount. At end of the current fiscal period, unamortized bond discount is $1,200.The balance sheet presentation of Cabot's bonds should include:

Bonds payable of $100,000 Less discount on bonds payable of $1,200

Which of the following are typically shown in an amortization schedule related to an installment notes payable?

The cash paid each payment period, the carrying value of the note at the beginning of the period, the carrying value of the note at the end of the period

The bond amortization schedule of Crocus Company shows that the carrying value of the bonds increased each interest period. From this information we can infer that the bonds issued at:

a discount

On January 2, 2018, 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, 2018, using the effective interest method, will be equal to

$3354

ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018?

$5000

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Credit cash $5000, debit interest expense $5705, credit discount on bonds payable $705

On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following?

Debit premium on bonds payable $789 Debit to interest expense $3,211 Credit cash $4,000

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

On January 1, ABC, Inc., issued $100,000 of 10%, 5-year bonds, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash?

The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.

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.

Which of the following are correct regarding bonds?

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

Periodic payments on installment notes typically include

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

A bond-related schedule that summarizes cash paid, interest expense, and changes in bond carrying value is referred to as a bond ______ schedule

amortization

A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n)

bond

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

bonds

Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:

credit to Bonds Payable debit to Cash credit to Premium on Bonds Payable

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:

credit to Notes Payable for $24,000

A bond will be issued at a premium when the market rate of interest is ______ the stated rate.

less than

On January 2, 2018, 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%. Interest expense on June 30, 2018, using the effective interest method, will be equal to (round to whole dollars)

$6709

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 and a credit to Bonds payable of $100,000

The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.

cash, bonds payable

Financing with ________ requires borrowing, whereas financing with _______ requires issuing shares of stock.

debt, equity

Munchen Company sold bonds at a premium. Over the life of the bonds, the carrying value of the bonds will

decrease

Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:

discount