Ch 14 Intermedia accounting

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

Bonds that do not include a call provision

may be repurchased on the open market

The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to

mislead investors.

Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit

notes payable

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.

Which of the following correctly describes a bond indenture?

A document detailing the promises made by the bond issuer.

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).

$115,589

Which of the following represent the typical characteristics of liabilities? (Select all that apply.)

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

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.

The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.

Periodic interest is incurred

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?

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

Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?

The method can only be used if it produces results that are not materially different from those produced by the effective interest method.

Which of the following represents an important difference between bonds with detachable warrants and convertible bonds?

The warrants can be separated from the bonds.

Which of the following are correct regarding bonds? (Select all that apply.)

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

The interest rate stated in a note is typically equal to the market rate.

True

Which of the following are true regarding zero-coupon bonds? (Select all that apply.)

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

Bond issue costs

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

The specific promises made to bondholders are described in a document referred to as a bond

indenture.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to

repay a certain amount at a specific date.

Installment notes typically involve the purchase of assets and (Select all that apply.)

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

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).

$217,966

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

Blank 1: convertible or conversion

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.)

Blank 1: effective Blank 2: interest

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

Blank 1: promissory

Which of the following statements is correct?

Bonds may sell below, above, or at their face amount.

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 discount on bonds payable for $51,000; credit bonds payable for $800,000.

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.

Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue?

Peter should recognize 3 months of interest

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.

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 record what journal entry? (Select all that apply.)

debit investment in bonds $200,000. credit cash $200,000

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

debt to equity ratio.

The interest rate on notes payable typically is equal to the ____ rate.

market

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:

value of the asset or service exchanged

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

zero

When an accounting period ends between interest dates, interest should be

accrued since the last interest date

Which of the following purchases frequently involve installment notes payable? (Select all that apply.)

automobiles land buildings

Schulz Company borrows cash from a bank and signs a promissory note. The bank should record

notes receivable

Gertrude Company receives $15,200 relating to its installment note receivable; of this amount $9,000 represents interest. In its statement of cash flows, this inflow should be reported as a(n)

operating activity inflow of $9,000. investing activity inflow of $6,200.

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

operating activity.

Zero-coupon bonds typically issue at a deep discount because they

pay no interest