acct 201 ch 9
The two types of financing are
debt equity
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
Loans requiring periodic payments of interest and principle are referred to as ___ notes
installment
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased.
When a corporation repurchases its bonds from the bondholders, the corporation ___ the bonds
retire
Callable bonds can be redeemed at the choice of
the bond issuer
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
false
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 rate of interest printed on the face of a bond is referred to as the ___ interest rate. (Enter one word per blank)
face
Bonds will be issued a premium if the stated interest rate is
greater than the market interest rate.
Werner issues bonds at a discount. The related Discount account should be classified as a(n) ___-___
contra-liability
the ___ rate of interest is an implied rate based on the price investors pay to purchase a bond. (Enter one word per blank)
market
Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:
discount
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 with ___ requires borrowing, whereas financing with ___ requires issuing shares of stock
debt equity
The true interest rate used by investors to value a bond issue is referred to as the:
market interest rate
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
A bond will be issued at a discount when the market rate of interest is
greater than the stated rate.
ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018 (rounded to the nearest dollar)?
$5,000
If ABC Company issues 100 of its $1,000 bonds at a price of $110,000, the journal entry will include which of the following entries?
A credit to Premium on Bonds Payable of $10,000 A credit to Bonds payable of $100,000 A debit to Cash of $110,000.
Which of the following statements is correct?
Bonds may be retired at maturity or retired early.
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 Discount on bonds payable for $2,000
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
___ bonds are retired when the bondholder exchanges them for the issuing company's stock.
Convertible
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
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 $5,705 Credit cash $5,000 Credit discount on bonds payable $705
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
Periodic payments on installment notes typically include (Select all that apply.)
a portion that reflects interest. a portion that reduces the outstanding loan balance.
Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at
a premium
A ___ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)
lease
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
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
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.
The debt to equity ratio is calculated as
Total liabilities / Total equity.
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
A corporation that wishes to borrow from the general public rather than a bank will issue
bonds
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 bond will be issued at a premium when the market rate of interest is ______ the stated rate.
less than
The Discount on Bonds Payable account is classified as a(n)
contra-liability.
the ___ rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)
stated
the ___ rate of interest is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense. (Enter one word per blank)
stated
the ___ rate of interest on a bond is the interest rate printed on the bond, whereas the ___ rate of interest is the current rate of interest being paid on investments with similar characteristics. (Enter one word per blank)
stated market
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
On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following?
Debit premium on bonds payable $789 Credit cash $4,000 Debit to interest expense $3,211
On January 1, ABC, Inc., issued $100,000 of 10%, 5-year bonds, for $92,280. Interest is due semiannually. When ABC records the first interest payment, which will be greater the debit to Interest Expense or the credit to Cash?
The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.
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.
Convertible bonds allow the lender to convert each bond into:
common stock
Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:
credit to Bonds Payable debit to Cash credit to Premium on Bonds Payable
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
The price of a bond includes
present value of the face amount plus the present value of the periodic interest payments
Corporate bonds most often pay interest
semiannually
Most corporate bonds pay interest
semiannually
