Chapter 10 Smartbook

A payment on an installment loan ______

affects all financial statements

When bonds sell at a discount, it means that the selling price is ______ the face value.

less than

A payment on an installment loan will be shown in the ______ activities sections of the statement of cash flows.

operating financing

Bonds that mature at specified intervals throughout the life of the total issue are called - bonds

serial

To ensure there is enough cash available at maturity to pay off the debt, a bond agreement may require the issuer to make regular payment into a(n) ______ fund.

sinking

To ensure there is enough cash available at maturity to pay off the debt, a bond agreement may require the issuer to make regular payment into a(n) - -

sinking fund

Most bonds require the issuer to make cash interest payments based on a(n) - interest rate

stated

The highest rating (lowest risk) that a company issuing bonds can receive is ______.

AAA

Issuing an installment note in exchange for cash affects the ______.

Balance sheet Statement of cash flows

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. Based on this information, the principal balance of the loan on January 1, Year 2 was ______.

$166,581 Reason: $51,419 annual payment - $18,000 interest expense for Year 1 ($200,000 ×.09) = $33,419 principal payment. $200,000 - $33,419 = $166,581

On January 1, Year 1, Zoe Company issued a $200,000, 9%, 5 year term installment loan. The loan required a $51,419 annual cash payment on December 31 of each year. The amount of interest expense incurred in Year 1 was ______.

$18,000 Reason: $200,000 principal balance × 9% = $18,000

Which of the following entities does not publish ratings of the risk of default as guides to bond investors?

Federal Government

Which of the following statements are true? The amount due at maturity is called the face value of the bond. The interest rate on a bond normally fluctuates from month to month. Bond interest is normally paid only on the maturity date. A bond certificate describes the issuer's obligation to pay interest and repay the principal.

The amount due at maturity is called the face value of the bond. A bond certificate describes the issuer's obligation to pay interest and repay the principal.

Recognizing a cash payment for interest on a line of credit ______.

decreases assets decreases net income

Bond premiums reduce the ______ interest rate.

effective

When compared to other creditors, the holder of an unsubordinated debenture has a(n) ______ priority claim.

equal

When a company makes a cash payment for interest on a bond that was issued at face value, ______

expenses increase assets decrease

When bonds are issued at a discount, they sell for less than - -

face value

Issuing an installment note for cash is recorded as a cash flow from - activites

financing

Bond obligations normally ______.

have longer terms to maturity than bank notes

A company may borrow funds one month and make a partial repayment the next under the terms of a(n) - of -

line credit

Loans that enable companies to borrow or repay funds as needed are called ______.

lines of credit

When compared to other creditors, the holder of a subordinated debenture has a(n) ______ priority claim.

lower

When a company issues a bond at a premium, the amount of cash collected from the issue is ______ the face value of the bond.

more than

True or false: Bonds that do not pay high enough interest to attract buyers may be discounted in order to make them more attractive.

true

Repaying a bond at maturity affects the ______.

Statement of cash flows Balance sheet

Borrowing money by issuing a bond causes assets ______.

and liabilities to increase

Borrowing funds through a line of credit is a(n) ______ transaction.

asset source

Issuing a bond to borrow money affects the ______.

balance sheet statement of cash flows

Issuing companies have the option to redeem (pay off) the debt before the maturity date with - bonds

callable

When a company makes a cash payment for interest on a bond that was issued at face value, ______ decreases.

cash flow from operating activities cash retained earnings

Convertible bonds ______.

have priority claims in bankruptcy settlements offer guaranteed interest payments can be exchanged for common stock or other specified ownership interest

Issuing an installment note in exchange for cash (select all that apply): decreases equity increases assets decreases assets decreases liabilities does not affect equity increases liabilities does not affect assets does not affect liabilities increases equity

increases assets does not affect equity increases liabilities

Loans that require payments of principal and interest at regular intervals are called - -

installment notes

Loans that require payments of principal and interest at regular intervals are called ______.

installment notes

A line of credit ______.

is classified as a short-term liability

A line of credit ______.

is normally renewable on a one year term normally has fluctuating interest rates.

When a company increases the amount borrowed on a line of credit, net income ______ and net cash flow from ______ activities increases.

is not affected, financing

A company experienced an event that caused assets, liabilities and cash flow from financing activities to increase, but had no effect on net income. This could have been due to ______.

issuing a bond with a 20 year term

A company experienced an event that caused assets, liabilities and cash flow from financing activities to decrease, but had no effect on net income. This could have been due to ______.

paying the principal balance of a bond at maturity

Until its maturity, the liability for a term bond issued at face value ______

remains constant and the liability for an installment note decreases

Over a 5-year term, interest expense for a term bond issued at face _______ and interest expense for an installment note ______.

remains constant; decreases

When a bond is issued at a premium, the - rate of interest is higher than the - rate of interest.

stated effective

Bonds that mature on a specified date in the future are called - bonds

term

True or false: Companies may choose to issue bonds in order to lower their interest costs.

true