ACCN-4110 Int Accn 2 Chp 14

Which of the following statements regarding convertible bonds subsequent to issuance is correct? > Accounting is different than for nonconvertible bonds. > Accounting is the same as for nonconvertible bonds.

Accounting is the same as for nonconvertible bonds.

Which ratio indicates profitability without regard to how resources are financed? Gross profit Profit margin Debt to equity ratio Rate of return on assets

Rate of return on assets

This ratio provides information about a company's effectiveness of employing resources provided by owners. Rate of return on assets Profit ratio Rate of return on shareholders' equity Debt to equity ratio

Rate of return on shareholders' equity

Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should > not recognize any premium or additional equity. > credit premium on bonds payable for $10,000. > credit additional paid-in capital—convertible bonds for $10,000.

credit premium on bonds payable for $10,000.

A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n)

debenture bond

Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the equity yield ratio. debt yield ratio. debt to equity ratio. debt ratio.

debt to equity ratio.

A bond that sells for less than its face amount is sold at a .

discount

Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the ____ ____ method. (Enter only one word per blank.)

effective interest

Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the current rate of return effective interest rate coupon rate stated interest rate

effective interest rate Periodic interest expense = debt outstanding x eff int rate

Effective interest expense is calculated as

effective rate x the carrying value of the debt outstanding during the period

At the time of maturity, the repayment amount for bonds is equal to the: Multiple choice question. > face amount less unamortized discount > face amount plus unamortized premium > face amount of the bonds

face amount of the bonds

A(n) _____ bond is backed by a lien on specified real estate owned by the issuer. (Enter only one word.)

mortgage

Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds.

mortgage

A bond that sells for more than its face amount is sold at a ____ .

premium

The issue price of bonds is calculated as the ____ value of all the cash flows required of the bonds.

present

Bonds that retire in installments during all or part of the life of the bond issue are called ____ bonds.

serial

Convertible bonds are retired when bondholders choose to convert them into shares of ____ .

stocks

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Margarita, Inc., purchased 2,500 of the bonds and converts them after 2 years. At that time, the balance in the premium on bond investment is $75,000. Margarita should recognize this conversion by debiting investment in common stock for

(2500 * 1000) + 75000 = 2575000

On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of

(95,842 x 0.035) - 3,000 = $354. 0.07/2 = 0.035

On January 1, 20X1, Greenbaum Corp. borrows $500,000 cash from First National Bank and issues a 2-year, $500,000 promissory note. Interest of $10,000 is payable semi-annually on June 30 and December 31. On the date of issuance, Greenbaum Corp. should credit

(D) Cash $500,000 (C) notes payable for $500,000.

On January 1, 20X1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds payable of

200000

Glueck Inc. issues $5 million face amount bonds at $5.2 million; interest of $100,000 is paid semi-annually for five years. At the maturity date, Glueck will pay bond investors:

5 Million The balance is reduced to face amount at maturity and the face amount is the balance remaining to be paid at maturity.

The interest rate on notes payable typically is equal to the ____ rate. prime short-term borrowing credit market

market

Under both US GAAP and IFRS, if the fair value of bonds is not readily determinable, the fair value may be calculated as the _____ _____ present value of the future cash flows using the of interest.

market rate

Bonds that do not include a call provision > must be outstanding until maturity > cannot be retired prior to the maturity date > may be repurchased on the open market

may be repurchased on the open market

Bonds that systematically mature over a succession of years are referred to as graded bonds callable bonds step bonds serial bonds

serial bonds

Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.) market rate carrying value stated rate face amount

stated rate face amount

Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as liquidating unsecured secondary subordinate

subordinate

Effective interest expense is calculated as

the effective rate x the carrying value of the debt outstanding during the period

If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the: return on the company's equity return on the company's debt interest rate stated on the note value of the asset or service exchanged

value of the asset or service exchanged

Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the value of the purchased equipment. maturity amount of the note. interest rate stated in the note.

value of the purchased equipment.

Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ____ coupon bonds. (Enter only one word.)

zero

Evergreen Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 20 shares of common stock. At the bond issue date, the company's common shares trade for $55 per share. At the date of issue, Evergreen should recognize an addition to equity of

$1000 bond /20 shares = $50 share conversion price (55 - 50) x 10,000 x 20 shares = $1,000,000.

Gruenwald Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 25 shares of common stock. At the bond issue date, the company's common shares trade for $44 per share. At the date of issue, Gruenwald should recognize an addition to equity of

$1000 bond /25 shares = $40 share conversion price (44 - 40) x 10,000 x 25 shares = $1,000,000.

On January 2, 20X1, 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 market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).

$191,684 (200,000 x 0.70892) + (6,000 x 8.31661) i = 7% n = 10 Present Value of $1 = 0.70892 PV Ord Annuity = 8.31661

On January 2, MLK Corp. issued $10 million of 8% bonds at 104. Each $1,000 bond is accompanied by 25 stock warrants. Each warrant permits the holder to purchase one share of no-par common stock for $20. Immediately after issuance, the warrants were listed on the stock exchange for $2 each. MLK should recognize equity from the sale of bonds of

$2 x 25 x 10,000 = 500000

On January 1, 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.

During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was:

$400

On January 2, 20X1, 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 market interest rate is 7%. The bond issues for $191,684. On June 30, the company should recognize a discount amortization of

$709. (191,684 x 0.035) - 6,000 = 709 7%/2 = .035

On January 2, 20X1, Schneider Company issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 8%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). $69,804 $95,944 $100,000 $82,032

$95,944 (100,000 x 0.67556) + (3,500 x 8.11090) n= 10 i = 4% PV of 1 = 0.67556 PV Ord Annuity = 8.11090

The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is

($100 + $150) / ($120 + $50 + $20) = 1.315789

A common reason for redeeming a bond prior to its maturity date is that > market interest rates decreased. > the market price of bonds decreased.

> market interest rates decreased.

Which of the following correctly describes a bond indenture? > A document detailing the promises made by the bond issuer. > The portfolio of bonds that are issued during a particular fiscal period. > The relationship between the effective interest and the stated interest rates.

A document detailing the promises made by the bond issuer.

Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct? > Debit cash for $749,000; debit loss on bonds payable for $51,000; credit bonds payable for $800,000. > Debit cash for $800,000; credit bonds payable for $800,000. > Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.

Debit Cash for $749,000; Discnt Bond Pay $51,000; Credit bonds payable $800,000.

Which of the following is correct regarding the effective interest method? > Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. > Interest recorded is equal to the effective interest rate multiplied by the issue price. > Interest paid is equal to the effective interest rate multiplied by the maturity value.

Interest expense = effective interest rate x outstanding balance of the debt.

Which of the following is correct regarding the rate of return on shareholders' equity? > It indicates the effectiveness of employing resources provided by owners. > It indicates profitability earned on nonfinancial assets. > It indicates profitability without regard to how resources are financed. > It indicates profitability on the company's financial assets.

It indicates the effectiveness of employing resources provided by owners.

Which of the following statements regarding the times interest earned ratio is correct? > It provides assurance that the loan will be paid back at maturity. > It indicates the margin of safety provided to creditors.

It indicates the margin of safety provided to creditors.

Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? > It is impractical for the issuer to enter into an agreement with each bondholder. > Bond issuers are not permitted to enter into separate agreements with bondholders. > A bank must guarantee a new bond issue.

It is impractical for the issuer to enter into an agreement with each bondholder.

Which of the following is true regarding a debenture bond? > It is secured by an outside third party. > It is secured by the faith and credit of the issuer. > It is secured by the issuer's long-term assets.

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

Which of the following is true regarding a debenture bond? It is secured by the faith and credit of the issuer. It is secured by the issuer's long-term assets. It is secured by an outside third party.

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

On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for? > Increase the cash proceeds and increase the discount and debt issue costs account > Reduce the cash proceeds and increase the bonds payable account > Reduce the cash proceeds and increase the discount and debt issue costs account

Reduce the cash proceeds and increase the discount and debt issue costs account

Private placements of bonds typically incur lower bond issue costs because they are not subject to any regulation. SEC registration. financial reporting.

SEC registration.

Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium? > The company's stated interest rate must be higher than that of other competing companies. > The company must have issued its bonds earlier than other companies competing in the same market. > The company's reputation must have been recently enhanced by positive publicity.

The company's stated interest rate must be higher than that of other competing companies.

Which of the following is an advantage of issuing bonds? > The fees associated with obtaining the funds are typically lower than for other large loans. > The interest rate on bonds is always lower than the rate on bank loans. > The total loan is broken into many parts, making it easier to find lenders.

The total loan is broken into many parts, making it easier to find lenders.

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? > The value of the conversion feature is not recognized separately. > The value of the conversion feature is recognized as additional paid-in capital.

The value of the conversion feature is not recognized separately.

Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond consistent with IFRS? > The value of the conversion feature is not recognized separately. > The value of the conversion feature is recognized as net income. > The value of the conversion feature is recognized as equity.

The value of the conversion feature is recognized as equity.

Which of the following statements is correct regarding the cost associated with issuing privately placed corporate bonds? > They are more costly to issue than publicly offered bonds. > They are less costly to issue than publicly offered bonds.

They are less costly to issue than publicly offered bonds. no SEC or underwriting cost

Which of the following are correct regarding bonds? (Select all that apply.) > They obligate the issuing company to pay a specific amount. > They obligate the issuing company to pay an estimated amount. > They obligate the issuing company to repay the bonds when interest rates increase. > They obligate the issuing company to repay the bonds when market interest rates decrease. > They obligate the issuing company to repay the bonds at a specific date.

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

Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? > They receive payment after secured debt has been satisfied. > They receive payment only after other specific debt has been satisfied. > They are paid at the same time that other specific debt is satisfied.

They receive payment only after other specific debt has been satisfied.

True or false: The implied interest rate may be different from the stated interest rate of a loan.

True The implied rate may be equal, greater or less than the stated rate.

True or false: The interest rate stated in a note is typically equal to the market rate.

True, The rate is typically negotiated at the time of the loan so the two are equal.

A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at: a premium a discount face amount

a discount

For bonds issued with detachable stock warrants, the issue price is: credited to equity only credited to bonds payable only allocated between debt and equity allocated between debt and gain

allocated between debt and equity

One of the advantages associated with bonds is that a relatively large amount of debt can be financed over a short-term horizon. broken into small portions. obtained from a single source.

broken into small portions.

Margot, an accounting student, tries to determine whether a bond sells at a premium, discount, or face amount. Margot can determine whether the bond sells at a premium, discount, or face amount > only by calculating the exact issue price and comparing it to the face amount. > by comparing the effective and stated interest rates.

by comparing the effective and stated interest rates.

Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as ____ bonds. convertible callable treasury exchangeable

callable

A bond feature that aims at making the bonds more attractive to investors is the ____ feature.

conversion

Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ____ bonds.

convertible

Bonds that permit bond holders to exchange their bonds for common stock are referred to as _____ bonds. Multiple choice question. redeemable stock exchangeable convertible treasury

convertible

The specific promises made to bondholders are described in a document called a bond _____ . (Enter only one word.)

indenture

At the beginning of the current year, Wagner Company purchases equipment and signs an installment note requiring 6 annual equal payments at the end of each year. The equipment would sell for $200,000 if the company paid cash. The company's effective borrowing rate is 7%. Wagner must make annual installment payments of (use the tables in your textbook and round to the nearest dollar)

i = 7% n = 6 PV Ord Annu = 4.766 200K/4.76654 = 41959

In situations when the interest rate is not readily apparent, the rate used to measure and account for the transaction should be the ___ interest rate. going stated implicit prime

implicit

On January 1, 20X1, Water 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 and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will

increase by $354. Difference between cash interest paid $3,000 and effective interest of $3,354 = $354 reduces the discount and increases the carrying value of the bond.

On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will decrease by $709. increase by $1,418 decrease by $1,418 increase by $709. not change.

increase by $709. The difference between the cash interest paid of $6,000 and the effective interest of $6709 decreases the bond discount, which increases the carrying value of the bond.

On January 2, 20X1, 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 market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).

n = 10 i = 2% 200k * 0.82035 + 6k * 8.98259 = 217966

On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars).

n =20 i = 2.5 PV of 1 = 0.61027 PV of Ord Annu = 15.58916 (100K x 0.61027) + (3.5K x 15.58916) = 61.027K + 19.56206 = $115.589

Accounting for convertible bonds subsequent to issuance is the same as accounting for _____. non-convertible bonds common stock bonds with detachable warrants

non-convertible bonds

Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit accounts payable bonds payable notes payable cash

notes payable

In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n) operating activity. investing activity. financing activity.

operating activity.

Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the > present value of the future cash flows using original rates. > maturity value plus accrued interest payable. > present value of the future cash flows using current rates.

present value of the future cash flows using original rates.

The issue price of a bond is always equal to the present value of the future cash flows. par or face amount of the bond. sum of future cash flows.

present value of the future cash flows.

Generally, liabilities are valued at their present value. net realizable value. fair market value. nominal amount.

present value.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to > reacquire the bonds when interest rates fall. > repay a certain amount at a date to be determined in the future. > pay interest if the company is profitable. > reacquire the bonds when interest rates rise. > repay a certain amount at a specific date.

repay a certain amount at a specific date.

On January 1, 20X1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On the date of issuance, First Rate Bank should debit "notes receivable" for

$300,000.

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should recognize this conversion by crediting common stock for

(10000 x 1000 + 300000) x 0.25 = 2575000

For the current interest period, Jones Corporation's accountant correctly recognized interest expense of $7,350 relating to Jones' bonds and paid $7,000 in interest to bond holders. The journal entry recording the interest also must have included a: > debit to premium on bonds payable > credit to premium on bonds payable > debit to discount on bonds payable > credit to discount on bonds payable

(D) Interest expense $7350 (C) Cash $7000 (C) discount on bonds payable $350

Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct?

(D) Investment in Bond 80K (C) Discount on Bond Invest 6K (C) Cash 74K

Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct? > Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000. > Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000. > Debit investment in bonds for $80,000; credit cash for $80,000.

(D) investment in bonds $80K (C) Discount on bond investment for $6K (C) Cash for $74K

Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit (Select all that apply.) > loss on conversion of bonds for $75,000. > bonds payable for $2,500,000. > premium on bonds payable for $75,000.

(D) premium on bonds payable for $75,000. (D) bonds payable for $2,500,000. (C) Common Stock: $2,575,000

The following selected information pertains to Wilson Company. Net income: $50; taxes: $20; interest: $10. The company's times interest earned ratio is

(Net Income + Taxes + Interest)/interest (50 + 20 + 10)/10 = 8

Mitchell's investment in convertible bonds has a net book value of $1.4 million when Mitchell converts the bonds to common stock. The fair value of the common stock is $1.5 million. Mitchell should recognize its investment in common stock at

1.4 Million

On January 2, 20X1, 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%. Effective interest recognized on June 30, 20X1, will be equal to (round to whole dollars)

191684 (0.07/2) = 6709 n = 10 i = 3%

On January 2, 20X1, 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 market interest rate is 7%. The bond issues for $191,684. On June 30, the company should recognize a discount amortization of

191684 (0.07/2) - 6000 = 709

On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will

6709 - 6000 = 709 increase of 709 The difference between the cash interest paid of $6,000 and the effective interest of $6709 decreases the bond discount, which increases the carrying value of the bond.

The times interest earned ratio is calculated as > Net income divided by interest expense > Interest expense divided by net income > Net income plus interest plus taxes divided by interest > Interest expense divided by income before interest and taxes

> (Net income + interest + taxes )/interest

Which of the following represent the typical characteristics of liabilities? (Select all that apply.) Future cash payments cannot be measured. Future cash payments are certain or estimable. The requirement of future cash payments. Interest accrues as time passes on long-term liabilities.

> Future cash payments are certain or estimable. > The requirement of future cash payments. > Interest accrues as time passes on long-term liabilities.

Which of the following is correct regarding the return on assets? > It indicates profitability without regard to how resources are financed. > It indicates profitability on the company's financial assets. > It indicates profitability on borrowed funds. > It indicates profitability earned on nonfinancial assets.

> It indicates profitability without regard to how resources are financed.

Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply.) > It indicates the leverage of the company. > It indicates the company's ability to pay its cost of borrowing. > It indicates the likelihood the loan will be paid back at maturity. > It indicates the company's margin of safety in terms of paying its fixed interest.

> It indicates the company's ability to pay its cost of borrowing. > It indicates the company's margin of safety in terms of paying its fixed interest.

Which of the following is correct regarding the default of a bond issuer? > Each bondholder must sue the issuing company for payment. > The trustee holding the indenture can sue the issuer on behalf of the bondholders. > A class action suit must be filed by the trustees as well as the individual bondholders.

> The trustee holding the indenture can sue the issuer on behalf of the bondholders.

Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) > The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock. > The warrants can be exercised separately from the bonds. > The warrants can be sold by the bondholder to another investor.

> The warrants can be exercised separately from the bonds. > The warrants can be sold by the bondholder to another investor.

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds? > The warrants can be separated from the bonds. > Bonds with detachable warrants typically sell for less than convertible bonds. > The warrants give the holder the option to purchase additional bonds at a favorable price.

> The warrants can be separated from the bonds.

Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? > They receive payment after secured debt has been satisfied. > They are paid at the same time that other specific debt is satisfied. > They receive payment only after other specific debt has been satisfied.

> They receive payment only after other specific debt has been satisfied.

Periodic payments on installment notes typically include > a portion that reflects interest at the effective interest rate. > a portion that reflects interest at the stated interest rate. > a portion that reduces the outstanding loan balance. > installment fees.

> a portion that reflects interest at the effective interest rate > a portion that reduces the outstanding loan balance.

Bond issue costs > decrease the effective interest rate of borrowing. > increase the effective interest rate of borrowing. > increase the cash proceeds from the issuance of debt. > reduce the cash proceeds from the issuance of debt. > do not affect the cash proceeds from the issuance of debt.

> increase the effective interest rate of borrowing. > reduce the cash proceeds from the issuance of debt.

Installment notes typically involve the purchase of assets and (Select all that apply.) > require periodic payments of interest and payment of the loan at maturity. > require installment payments over time. > defer interest payments until maturity. > periodic payments include principal and interest.

> require installment payments over time. > periodic payments include principal and interest.

Jennifer, an Intermediate Accounting student, wants to determine whether a particular bond issue will sell at face amount, a premium, or discount without calculating the actual issue price. Jennifer should compare the ____ and the ____. > expected return; estimated return > stated interest rate; market interest rate > face amount; estimated sales price

> stated interest rate; market interest rate

Neumann Corp. compares three different investment opportunities. Opportunity A $1 million in debt and $2 million in equity; Opportunity B, $1.5 million in debt and $2 million in equity; Opportunity C, $1 million in debt and $2.5 million in equity. If the companies are equal in all other aspects, which of the investment opportunities tends to have the lowest investment risk?

A = 0.5 B = 0.75 C = 0.4 Opportunity C

On January 1, 20X1, Water 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 and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will

Difference between cash interest paid $3,000 and effective interest of $3,354 = $354 reduces the discount and increases the carrying value of the bond.

Proverbial Corp. signed a 6-year note relating to the purchase of a new delivery fleet; annual payments are due at the end of the year. Proverbial's effective interest rate is 8%. At the time of purchase, the company recorded the fleet at $200,000. At the end of the first year, the net book value has decreased to $160,000, while the carrying value of the note is $164,000. Interest expense relating to the second year should be

Eff Rate x Debt Amt Outstanding 164K * 0.08 = 13120

On January 2, 20X1, 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, 20X1, will be equal to (round to the nearest full dollar)

Effective Interest: 3354 95842 x 0.07/2 = 95842 x 0.035 = 3354 n = 10 i = 3%

The following highlights differences between loans with the principal due at maturity and installment loans. Correctly match each characteristic with the type of loan it applies to. Installment loan > Periodic payment includes interest and a portion that reduces the outstanding loan. Loan with lump-sum principal payment at maturity > Periodic payment does not include a portion of principal.

Installment loan > Periodic payment includes interest and a portion that reduces the outstanding loan. Loan with lump-sum principal payment at maturity > Periodic payment does not include a portion of principal.

The following highlights differences between loans with the principal due at maturity and installment loans. Correctly match each characteristic with the type of loan it applies to. Installment loan > The loan balance is reduced over time and reaches zero at the end of the loan term. Loan with lump sum principal payment at maturity > The loan balance reflects the face amount at the date of maturity.

Installment loan > The loan balance is reduced over time and reaches zero at the end of the loan term. Loan with lump sum principal payment at maturity > The loan balance reflects the face amount at the date of maturity.

On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on January 1 and July 1. On December 31, 20X1, the company should credit bond discount for $800. interest expense for $7,800. interest expense for $7,000.

Interest Expense 195K * 0.08/2 = 7.8K Semiannual Interest 200K*0.07/2 = 7K Discount Amortized 7.8K - 7K = 0.08K

Margot wants to calculate the installment payment amount for a new installment notes payable of $200,000, which is due in ten years. Based on the interest rate, Margot determined that the applicable present value factor is 8.1109. Rounding to whole dollars, the installment payment amount is:

Loan Amount / PV of Annuity 200K/ 8.1109 = $24,658

The return on assets is calculated by dividing ____ ____ by total assets. (Enter only one word per blank.)

Net Income

The return on shareholders' equity is calculated by dividing ____ ____ by total shareholders' equity. (Enter one word per blank)

Net Income

The return on shareholders' equity is calculated by dividing _____ _____ by total shareholders' equity. (Enter one word per blank)

Net Income

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on shareholders' equity expressed as a percentage is:

Net Income/Shareholders Equity 50/(400 - 220) = 27.78%

The times interest earned ratio is calculated as > Interest expense divided by net income > Interest expense divided by income before interest and taxes > Net income divided by interest expense > Net income plus interest plus taxes divided by interest

Net income plus interest plus taxes divided by interest (Net income + interest + taxes)/ interest

A company that recognizes a long-term notes payable has signed the legal document referred to as a ____ note.

Promissory

Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) > Factoring bonds through a licensed factor. > Purchasing bonds on the open market. > Including a call feature when the bonds are issued.

Purchasing bonds on the open market. Including a call feature when the bonds are issued.

The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is

Rate of Return on Assets Net Income/Total Assets 50/400 = 12.5%

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.) > To enable smaller or debt-heavy companies to gain access to the bond market. > To sell the bonds at a higher price. > To provide investors with a means for diversifying investment risk. > To use a medium of exchange in mergers and acquisitions.

To enable smaller or debt-heavy companies to gain access to the bond market. To sell the bonds at a higher price. To use a medium of exchange in mergers and acquisitions.

Which of the following are true regarding zero-coupon bonds? (Select all that apply.) >Zero-coupon bonds issue at deep discounts. > Zero-coupon bonds pay 5% interest. > Zero-coupon bonds do not pay interest.

Zero-coupon bonds do not pay interest Zero-coupon bonds issue at deep discounts.

Which of the following are true regarding zero-coupon bonds? (Select all that apply.) > Zero-coupon bonds do not pay interest. > Zero-coupon bonds are traded at a premium. > Zero-coupon bonds pay 5% interest.

Zero-coupon bonds do not pay interest.

Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. Consistent with IFRS, on the date of issuance Wasser should

credit equity-conversion option for $10,000. Debit: > Cash 510,000 Credit > convertible bond payable 500,000 > equity-conversion option 10,000.

The debt equity ratio can provide information regarding a company's risk that it will be unable to pay its debt when due. This is called the company's ____ risk.

default

A conversion feature is "beneficial" if the stock into which the bond can be converted > is less than the face amount of the bond. > is equal to the face amount of the bond. > exceeds the face amount of the bond.

exceeds the face amount of the bond.

The fundamental reason why companies issue convertible bonds is to > make the bonds more attractive to investors. > ward off hostile takeovers. > improve their debt equity ratio.

make the bonds more attractive to investors.

Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In Kordel's statement of cash flows, this payment should be reported as (Select all that apply.) > operating activity outflow of $9,000. > financing activity outflow of $15,200. > operating activity outflow of $15,200. > financing activity outflow of $6,200.

operating activity outflow of $9,000. financing activity outflow of $6,200.

In the statement of cash flows, interest received on long-term notes receivable should be reported as inflows from a(n) financing activity. investing activity. operating activity.

operating activity.

Using the effective interest method, the bond issuer calculates interest expense based on the: face amount of the bonds outstanding balance of the bonds expected future value of the bonds

outstanding balance of the bonds

Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt outstanding during the interest period. that has to be repaid at maturity. referred to as the face amount. referred to as the par value.

outstanding during the interest period.

A bond investor who applies the effective interest method calculates interest revenue based on the _____ balance of the bonds times the _____ interest rate.

outstanding; effective

Zero-coupon bonds typically issue at a deep discount because they offer a high interest rate are high risk bonds offer a low interest rate pay no interest

pay no interest

Amortization of bond discounts results in the bond being valued on the balance sheet at the > maturity value of the bonds plus the remaining interest payments. > maturity value of the bonds. > present value of the associated future cash flows.

present value of the associated future cash flows.

Consistent with IFRS, if the fair value of convertible bonds for which no active market exists cannot be determined, the value of the bonds can be calculated based on the > residual value between issue price and fair value of the conversion feature > face amount of the bonds plus interest > present value of the bonds' cash using the stated interest rate > present value of the bonds' cash flows using the market interest rate

present value of the bonds' cash flows using the market interest rate