Chapter 9 SB

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

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 Which of the following is true?

Both bonds yield a return of 6% to investors.

True or false: The times interest earned formula is net income divided by interest expense.

False Reason: The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense.

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

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

coupon

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

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

Callable bonds can be redeemed at the choice of

the bond issuer.

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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

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.

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

Periodic payments on installment notes typically include (Select all that apply.)

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

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

a single large investor.

The two types of financing are

debt financing. equity financing.

Financing with ____ requires borrowing, whereas financing with ___ requires issuing shares of stock.

debt; equity

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

greater than the market interest rate.

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

installment notes

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

market interest rates decreased.

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

maturity date

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

bonds

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

retires the bond