Financial Accounting Chapter 9
A series of equal amounts paid or received over equal time periods is called a(n) ____.
annuity
True or false: The times interest earned formula is net income divided by interest expense.
false
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. -equal to the market interest rate. -fluctuating on the day of issuance. -less than the market interest rate.
greater than the market interest rate.
A common reason for redeeming a bond prior to its maturity date is that -market interest rates decreased. -market interest rates increased. -the market price of bonds decreased.
market interest rates decreased.
A(n) ______ bond is backed by a lien on specified real estate owned by the issuer.
secured
The rate of interest printed on the face of a bond is referred to as the _____ interest rate.
stated
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 -bonds payable risk -investment risk -business risk
default risk
The two types of financing are -equity financing. -operating financing. -investing financing. -debt financing.
equity financing. debt financing.
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by _____ _____.
interest expense
Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as -convertible bonds -term bonds -serial bonds
term bonds
Bonds that mature on one specific date 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 bondholder. -the bond issuer. -both the bond issuer and bondholder.
the bond issuer.
Bonds that are backed by collateral are ______. -convertible -secured -debentures -callable
secured
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are: -secured -unsecured -convertible
secured
Which of the following are common characteristics or provisions of bonds? -free or redeemable -secured or unsecured -perpetual or periodic -convertible -callable
secured or unsecured convertible callable
Which of the following are common characteristics or provisions of bonds? -perpetual or periodic -secured or unsecured -term or serial -indefinite or redeemable -convertible
secured or unsecured term or serial convertible
Corporate bonds most often pay interest ____.
semiannually
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: -Carrying value of $101,200 -Bonds payable of $100,000 -Less discount on bonds payable of $1,200
Bonds payable of $100,000 Less discount on bonds payable of $1,200
Convertible bonds matches with: -Bonds are backed by collateral -The issuing company can pay off the bonds at any time -Bonds that can be exchanged for shares of stock in the issuing company -Bond issue that matures on a single date -Bonds that mature in installments
Bonds that can be exchanged for shares of stock in the issuing company
Serial bonds matches with: -Bonds are backed by collateral -The issuing company can pay off the bonds at any time -Bonds that can be exchanged for shares of stock in the issuing company -Bond issue that matures on a single date -Bonds that mature in installments
Bonds that mature in installments
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 ______. -Notes Payable; Cash -Cash; Bonds Receivable -Cash; Bonds Payable -Bonds Payable; Cash
Cash; Bonds Payable
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 $6,000 -Credit discount on bonds payable $705 -Debit interest expense $6,000 -Debit interest expense $5,705 -Credit cash $5,000
Credit discount on bonds payable $705 Debit interest expense $5,705 Credit cash $5,000
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ______ placement.
private
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 B -Company D -Company C -Company A
Company D
____ bonds are retired when the bondholder exchanges them for the issuing company's stock.
Convertible
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: -$204,500 -$200,000 -$4,500 -$195,500
$195,500
Term bonds matches with: -Bonds are backed by collateral -The issuing company can pay off the bonds at any time -Bonds that can be exchanged for shares of stock in the issuing company -Bond issue that matures on a single date -Bonds that mature in installments
Bond issue that matures on a single date
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 $10,000 -Debit interest expense $12,000 -Credit cash $6,000 -Credit cash $5,000
Credit cash $5,000
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 equal the bond's face value. -The issue price will be below the bond's face value. -The issue price will be above the bond's face value.
The issue price will be above the bond's face value.
Callable bonds matches with: -Bonds are backed by collateral -The issuing company can pay off the bonds at any time -Bonds that can be exchanged for shares of stock in the issuing company -Bond issue that matures on a single date -Bonds that mature in installments
The issuing company can pay off the bonds at any time
______ bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
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 -A debit to loss on bond issuance -A credit to discount on bonds payable for $2,000
A debit to discount on bonds payable for $2,000 A credit to bonds payable for $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: -Cash for $98,000 -Cash for $100,000 -A debit to loss on bond issuance for $2,000 -Discount on bonds payable for $2,000
Cash for $98,000 Discount on bonds payable for $2,000
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 carrying value at maturity is equal to the face amount of bonds issued at: -discount and premium only -face amount only -face amount and discount only -face amount, discount, and premium -face amount and premium only
face amount, discount, and premium
Loans requiring periodic payments of interest and principle are referred to as ______ notes.
installment
Most corporate bonds pay interest -semiannually. -quarterly -annually -monthly.
semiannually.
When a corporation repurchases its bonds from the bondholders, the corporation _____ the bonds.
retires
The ____ rate of interest is used to compute the cash interest paid to bondholders.
stated
Which of the following statements is correct? -Bonds for which the effective interest rate rises must be retired early. -Bonds can be retired only at maturity. -Bonds may be retired at maturity or retired early.
Bonds may be retired at maturity or retired early.
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 -$100,196 -$100,000 -$92,418
$92,278
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. -$93,643 -$100,000 -$88,699 -$95,056
88,699
Secured matches with: -Bonds are backed by collateral -The issuing company can pay off the bonds at any time -Bonds that can be exchanged for shares of stock in the issuing company -Bond issue that matures on a single date -Bonds that mature in installments
Bonds are backed by collateral
Identify two ratios commonly used to assess a company's financial risk. -Current ratio -Debt to equity ratio -Times interest earned ratio -Gross profit ratio -Equity yield ratio
Debt to equity ratio Times interest earned ratio
Identify the characteristics of an annuity. -Equal time periods between payment dates -A series of amounts that are equal -Varying time periods between payment dates -A series of amounts that vary from period to period
Equal time periods between payment dates A series of amounts that are equal
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
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False
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 -Adams -Flagler
Roberts
_____ bonds are supported by a specific asset the issuer pledges as collateral.
Secured
True or false: When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.
True
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 credit to Cash of $6,000 -a debit to Interest payable of $6,000 -a credit to Interest expense of $6,000 -a debit to Interest expense of $6,000
a credit to Cash of $6,000 a debit to Interest expense of $6,000
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 debit to Interest expense of $500 -a credit to Cash of $6,000 -a credit to Interest payable of $500 -a debit to Interest expense of $6,000 -a credit to Cash of $500
a debit to Interest expense of $500 a credit to Interest payable of $500
Periodic payments on installment notes typically include (Select all that apply.) -a portion that reflects interest. -an increase in stockholders' equity -installment fees. -a portion that reduces the outstanding loan balance.
a portion that reflects interest. a portion that reduces the outstanding loan balance.
In a private placement of bonds, bonds may be sold to -a single large investor. -the general public. -an underwriter who sells it to individual investors.
a single large investor.
A corporation that wishes to borrow from the general public rather than a bank will issue -bonds. -notes payable. -common stock. -preferred stock.
bonds
Convertible bonds allow the lender to convert each bond into: -secured bonds -preferred stock -common stock
common stock
Werner issues bonds at a discount. The related Discount account should be classified as a(n) ____ ____
contra liability
The Discount on Bonds Payable account is classified as a(n) -loss. -expense. -contra-liability. -asset.
contra-liability.
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 $99,000 and to Premium on bonds payable of $1,000. -debit to Cash of $100,000 and a credit to Bonds payable of $100,000. -debit to Bonds payable of $100,000 and a credit to Cash of $100,000.
debit to Cash of $100,000 and a credit to Bonds payable of $100,000.
Financing with ______ requires borrowing, whereas financing with ______ requires issuing shares of stock.
debt, equity
Bonds may issue at: -face amount -book value -a premium -a discount
face amount a premium a discount
The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company. -lower -higher
higher
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) -contingent contract. -lease. -indenture. -direct purchase plan.
lease
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
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's: -current liabilities -total assets -long-term debt -net income
long-term debt
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 -current liabilities -current assets -net income
long-term liabilities
The true interest rate used by investors to value a bond issue is referred to as the: -market interest rate -stated interest rate -prime interest rate -nominal interest rate
market interest rate
Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value is equal to face amount at the _____ date.
maturity
The price of a bond includes -the present value of the face amount plus the present value of the periodic interest payments -the present value of the face amount minus the present value of the periodic interest payments -the present value of the face amount -the present value of the periodic interest payments
the present value of the face amount plus the present value of the periodic interest payments
The debt to equity ratio is calculated as -current liabilities divided by total stockholders' equity. -noncurrent liabilities divided by current liabilities + stockholders' equity. -long-term debt divided by total stockholders' equity. -total liabilities divided by total stockholders' equity.
total liabilities divided by total stockholders' equity.