Accounting - Chapter 10 Smart Book Questions

Bonds are securities that can be readily bought and sold. A bond issue consists of a number of bonds, usually in denominations of ______ or _____ and is sold to many different lenders.

$1,000; $5,000

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $blank

Blank 1: 8179

Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is sold at 93 will trade at $blank

Blank 1: 930

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by:

Reason: $15,142-5,600=$9,542. $9,542

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $8,179. The journal entry to record this payment will include a debit to which of the following accounts and in what amount? (Check all that apply.)

Notes Payable; $8,179 Interest Expense; $4,800

The bond carrying value can be determined by which of the following formulas?

Par value - discount on bonds payable

A company issues $500,000 of 9%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $480,000, yielding a discount of $20,000. Using the straight-line amortization method, the company will amortize the discount by ________ on each semiannual interest payment.

$23,500 Reason: ($500,000-$480,000)=$20,000/20 periods=$1,000.

Bond market values are expressed as a percentage of their par (face) value. For example, a company's bonds might be trading at 103, which means that they can be bought or sold for ____ of their par value.

103%

A company issues $90,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $85,000 for the bonds, the issuer will record the sale with a (debit/credit) blank to Discount on Bonds Payable in the amount of $blank

Blank 1: debit Blank 2: 5000

When the market rate is 8%, a company issues $50,000 of 9%, 10-year bonds and pay interest semiannually for a selling price of $60,000. When the bonds mature, the issuer records its payment of principal with a (debit/credit) blank to Bonds Payable in the amount of $blank

Blank 1: debit Blank 2: 50000

A company issues $60,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $62,000 for the bonds, the premium on bonds payable will (increase/decrease) blank total interest expense recognized over the life of the bond by $blank

Blank 1: decrease Blank 2: 2000

A(n) blank on bonds payable occurs when a company issues bonds with a contract rate less than the market rate.

Blank 1: discount

Total bond interest blank is the sum of the interest payments plus the bond discount.

Blank 1: expense

The legal contract between the bondholders and the issuer is called the bond blank

Blank 1: indenture

A company borrows $60,000 from a bank to purchase equipment. It signs an 8% note requiring six annual payments of principal plus interest. This is an example of a(n) blank note

Blank 1: installment

Star Bank provided cash to a customer, J. Brown, to pay for a building. Star required that Brown also sign a(n) blank (mortgage/installment/bond) note payable, which allows the bank to be paid by the cash proceeds of the sale of the building if Brown fails to pay on the note.

Blank 1: mortgage

Lyle Co. borrowed $20,000 from First Bank by signing a written promise to pay a definite sum of money on a specific future date. Lyle will record this in the general ledger as a(n) blank payable

Blank 1: note or notes

The bond carrying value can be determined by taking the bond blank value minus the discount on bonds payable.

Blank 1: par

Most bonds require (interest/par) blank value to be repaid at maturity and (interest/par) blank to be paid semiannually.

Blank 1: par Blank 2: interest

When the market rate is less than the bond contract rate on the date of issuance, the bonds will be sold at a (discount/premium) blank

Blank 1: premium

Many bonds are (sinking/secured) blank fund bonds, which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

Blank 1: sinking

A company issues $500,000 of 6%, 10-year bonds dated January 1, 2017 that mature on December 31, 2026. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with which of the following entries?

Debit to Cash $500,000; and credit to Bond Payable $500,000.

Forever, Inc. announces an offer to issue bonds with a $100,000 par value, an 8% annual contract rate (paid semiannually) and a two-year life. The market rate is 10%, so the bonds will be sold at:

a discount

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Bond Payable in the amount of _______.

credit; $100,000 Reason: A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a credit to Bond Payable in the amount of $100,000.

A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to (Discount/Premium) ______ on Bonds Payable in the amount of $5,000.

credit; Premium

A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the $5,000 premium on bonds payable will ________ total interest expense recognized over the life of the bond.

decrease

The legal contract between the bondholders and the issuer is called the bond ______.

indenture

A(n) _____ note is an obligation requiring a series of payments to the lenders.

installment

A bond discount increases __________ at each semi-annual interest payment.

interest expense

A(n) _______ is a legal agreement that helps to protect a lender if a borrower does not make required payments on notes or bonds. This agreement gives the lender the right to be paid from the cash proceeds of the sale of the borrower's assets, as identified in the agreement.

mortgage

A _____ _____ is similar to a bond payable but is normally transacted with a single lender such as a bank.

note payable

The ________ value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's maturity date.

par

The bond contract rate determines the annual interest paid by multiplying the bond ______ value by the contract rate.

par

When the contract rate of the bonds is higher than the market rate, the bond sells at a higher price than par value. The amount by which the bond price exceeds par value is the _______ on bonds.

premium

Bonds issued in the names and addresses of their holders are _______ bonds.

registered

_______ bonds (and notes) have specific assets of the issuer pledged (or mortgaged) as collateral.

secured

_______ bonds (and notes) mature at more than one date (often in series) and, thus, are usually repaid over a number of periods.

serial

Many bonds are _______, which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

sinking fund bonds

_____ bonds (and notes) are scheduled for maturity on one specified date.

term

_______ bonds (and notes), also called debentures, are backed by the issuer's general credit standing.

unsecured

A company issues $50,000 of 5%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $48,000. Using the straight-line amortization method, the company will amortize the discount by $blank on each semiannual interest payment.

Blank 1: 100

Most bonds require par value to be repaid _______ and interest to be paid _________.

at the maturity date; semiannually

Bonds payable to whomever holds them are called _____ bonds or unregistered bonds.

bearer

The ________ rate is the interest rate specified, sometimes referred to as the coupon rate, stated rate, or nominal rate.

contract

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $98,000 for the bonds, the issuer will record the sale with a (debit/credit) blank to Bonds Payable in the amount of $blank

Blank 1: credit Blank 2: 100000 or 100,000

A company issues $400,000 of 8%, 10-year bonds dated January 1. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with a (debit/credit) blank to Bonds Payable in the amount of $blank

Blank 1: credit Blank 2: 400000

When the market rate is 10%, a company issues $60,000 of 12%, 10-year bonds and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a (debit/credit) blank to Cash in the amount of $blank

Blank 1: credit Blank 2: 60000

A company issues $80,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $84,000 for the bonds, the issuer will record the sale with a (debit/credit) blank _ to (Discount/Premium) blank _ on Bonds Payable in the amount of $4,000.

Blank 1: credit Blank 2: Premium

A company issues $60,000 of 5%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $59,000 for the bonds, the issuer will record the sale with a (debit/credit) blank to Discount on Bonds Payable in the amount of $blank

Blank 1: debit Blank 2: 1000