accounting smartbook 9

Which of the following statements is correct?

Bonds may be retired at maturity or retired early.

Identify two ratios commonly used to assess a company's financial risk.

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

Premium bonds

Interest expense decreases each interest period

Discounted bonds

Interest expense increases each interest period

Which of the following is true regarding a debenture bond?

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

Corporate bonds most often pay interest

Semiannually

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

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.

debenture

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

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)

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:

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

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

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

private

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

retired

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

secured

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

secured

Most corporate bonds pay interest

semiannually.

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.

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

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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

false

Bonds that mature on one specific date are called ______ bonds, whereas bonds that mature in installments are referred to as ______ bonds.

term, serial

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

term

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

early extinguishment of debt.

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

Most bonds issued today are ______.

unsecured

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

installment

Bonds that are backed by collateral are ______.

secured

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

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

annuity

Werner issues bonds at a discount. The related Discount account should be classified as a(n) ________ ______

contra liability

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 Interest payable of $500

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

market

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

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

Issued at a 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

Issued at a discount

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

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.

Which of the following are correct regarding bonds?

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

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

Unsecured

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 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 bonds will issue at:

a discount

Periodic payments on installment notes typically include

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

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.

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

debt equity

The two types of financing are

debt financing equity financing

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 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

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

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

nominal

______ 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:

Discount on bonds payable for $2,000 Cash for $98,000

The Discount on Bonds Payable account is classified as a(n)

contra-liability.

Which of the following are common characteristics or provisions of bonds?

convertible secured or unsecured term or serial

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

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

earnings

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

face amount, discount, and premium

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

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 Less discount on bonds payable of $1,200

Which of the following financial ratios provides information about the income generated per dollar of assets?

Return on assets

Convertible bonds allow the lender to convert each bond into:

common stock

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

nominal

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 Credit discount on bonds payable $705 Debit interest expense $5,705

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

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

convertible

Which of the following are common characteristics or provisions of bonds?

convertible callable secured or unsecured

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by _______ ________ .

interest expense