Chapter 9 - Learnsmart

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

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

Term

Bond issue that matures on a single date

Secured

Bonds are backed by collateral

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

Common characteristics or provisions of bonds include:

Callable, secured or unsecured and convertible

Issued at premium

Carrying value decreases over time and is equal to face amount at maturity

Issued at face amount

Carrying value does not change and is equal to issue price

Premium bonds

Interest expense decreases each interest period

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

Secured

____________ bonds are supported by a specific asset the issuer pledges as collateral.

Secured

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 and discount on bonds payable for $2,000

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

Convertible bonds allow the lender to convert each bond into:

Common stock

Debenture bonds are

secured by the faith and credit standing of the issuer.

Corporate bonds most often pay interest _____________.

semiannually

Issued at a discount

Carrying value increases over time and is equal to face amount at maturity

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

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

The discount on bonds payable account is classified as a(n)

Contra-liability

Bonds that require payment of the full principle amount of the bonds at the end of the loan term are referred to as

Term bonds

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

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

Market interest rate

A common reason for redeeming a bond prior to its maturity date is that

Market interest rates decreased

An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the ____________ date.

Maturity

Regardless of whether bonds are issued at face amount, or discount, or a premium, their carrying value is equal to face amount at the ____________ date

Maturity

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

Retired

Corporate bonds most often pay interest __________________.

Semiannually

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 and Discount on bonds payable for $2,000

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

Installment

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by _____________ ______________

Interest expense

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's

Long-term debt

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

Long-term debt

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

Market or effective

Neumann Corporation is planning to issues bonds with a face amount of $2 million. If Neumann's accountant, Betty, wants to calculate the expected issue she should calculate the ____ of the related future cash payments using the ____ interest rate.

Present value, market

The debt to equity ratios for three otherwise comparable companies are as follows: Adams: 1.5; Flagler: 1.8; Roberts: 1.4. The risk of bankruptcy appears to be lowest for:

Roberts

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

Secured

Bonds that are backed by collateral are ____________.

Secured

Most corporate bonds pay interest

Semiannually

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

Stated

______________ bonds require payment of the full principle amount of the bond at the end of the loan term.

Term

_______________ bonds require payment of the full principle amount of the bond at the end of the loan term

Term

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as

Term bonds

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 and a credit to cash of $6,000

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

A discount

Periodic payments on installment notes typically include

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

Characteristics of annuity include:

A series of amounts that are equal, equal time periods between payment dates

In a private placement of bonds, bonds may be sold to

A single large investor

A series of equal amounts paid or received over equal time periods is called a(n)

Annuity

Bonds may

Be retired at maturity or retired early

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 $5,000, debit interest expense $5,705 and credit discount on bonds payable $705

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

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

Callable bonds

The issuing company can pay off the bonds at any time

Two ratios commonly used to assess a company's financial risk

Times interest earned ratio, and debt to equity ratio

The debt to equity ratio is calculated as

Total liabilities divided by total stockholders' equity

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.

Unsecured

Most bonds issued today are _________.

Unsecured

Which of the following are the most common types of bonds?

Unsecured

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

Stated

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

Bonds

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

Lease

What are common characteristics or provisions of bonds?

Term or serial, secured or unsecured, convertible

Bonds that mature on one specific dates are called ____________ bonds, whereas bonds that mature in installments are referred to as ___________ bonds.

Term, serial

Callable bonds can be redeemed at the choice of

The bond issuer

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

Market or effective

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) __________ placement.

Private

The return on assets measures the amount of ________ generated for each dollar of assets.

Profit

Return on assets

Provides information about the income generated per dollar of assets

An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the _________ date

Maturity

___________ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

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 $5,000

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

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

A contract in which an owner provides a user the right to use an asset in return for periodic cash payments over a period of time is called a(n)

Lease

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?

Debit interest expense $5,705, credit cash $5,000, and credit discount on bonds payable $705

The two types of financing are

Debt and equity

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

Debt, Equity

The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's ____________ risk.

Default

The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's ______________ risk.

Default

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:

Default risk

If bonds are retired before the maturity date, this is considered a(n)

Early extinguishment of debt

Characteristics of an annuity

Equal time periods between payment dates, a series of amounts that are equal

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

Face amount, discount, and premium

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

Convertible bonds

Bonds that can be exchanged for shares of stock in the issuing company

Serial bonds

Bonds that mature in installments

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 discount on bonds payable $705, credit cash $5,000 and debit interest expense $5,705

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock

False

True or false: the debt to equity ratio is calculated as total liabilities divided by common stock

False

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ____________ risk.

Financial

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of _____________ risk

Financial

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

Greater than the market interest rate

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

Greater than the stated rate

The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company

Higher

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

Installment

Discounted bonds

Interest expense increases each interest period

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 and less discount on bonds payable of $1,200

On January 2, 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

You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0

Company D

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

Contra liability

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 a credit to bonds payable for $100,000