Chapter 9 Reading

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ____________ risk

financial

The bond amortization schedule of Crocus Company shows that the carrying value of the bonds increased each interest period. From this information we can infer that the bonds issued at: a) face amount b) a discount c) a premium

B

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.

stated; market

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 a) debit to Cash of $100,000 and a credit to Bonds payable of $100,000. b) debit to Cash of $100,000 and a credit to Bonds payable of $99,000 and to Premium on bonds payable of $1,000. c) debit to Bonds payable of $100,000 and a credit to Cash of $100,000.

A

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) a debit to Interest expense of $6,000 b) a credit to Cash of $6,000 c) a credit to Interest expense of $6,000 d) a debit to Interest payable of $6,000

A & B

Identify two ratios commonly used to assess a company's financial risk. a) Times interest earned ratio b) Debt to equity ratio c) Gross profit ratio d) Current ratio e) Equity yield ratio

A & B

Munchin Corporation has $200,000 of 6% bonds that were issued in Year 1 at $202,000. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries? a) Debit bonds payable $200,000 b) Credit cash $200,000 c) Credit bonds payable for $202,000 d) Credit bonds payable $200,000 e) Debit cash for $202,000

A & B

The two types of financing are a) debt financing. b) operating financing. c) equity financing. d) investing financing.

A & C

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: a) Discount on bonds payable for $2,000 b) A debit to loss on bond issuance for $2,000 c) Cash for $100,000 d) Cash for $98,000

A & D

Most corporate bonds pay interest a) monthly. b) semiannually. c) quarterly d) annually

B

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) A debit to Cash of $110,000. b) A credit to Bonds payable of $100,000 c) A credit to Premium on Bonds Payable of $10,000 d) A debit to Cash of $90,000. e) A debit to interest expense of $10,000.

A, B, & C

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

Convertible

A corporation that wishes to borrow from the general public rather than a bank will issue a) notes payable. b) common stock. c) preferred stock. d) bonds.

D

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

Term

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

stated

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) a) lease. b) direct purchase plan. c) indenture. d) contingent contract.

A

The bond amortization schedule of Kroken Company shows that cash paid for interest exceeds interest expense. From this information we can infer that the bonds were issued at: a) face amount b) a discount c) a premium

C

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? a) The issue price will be above the bond's face value. b) The issue price will be below the bond's face value. c) The issue price will equal the bond's face value.

A

Bonds that are backed by collateral are ______. a) secured b) debentures c) callable d) convertible

A

A common reason for redeeming a bond prior to its maturity date is that a) market interest rates decreased. b) the market price of bonds decreased. c) market interest rates increased.

A

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)? a) $5,000 b) $10,000 c) $12,000 d) $6,000 e) $5,537

A (Payment to bondholders = $100,000 x 10% x (6/12) = $5,000; Interest expense is $5,537 (=92,280 x 12% (6/12)). The difference of $537 is the amortization of the discount.)

Convertible bonds allow the lender to convert each bond into: a) preferred stock b) common stock c) secured bonds

B

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

installment

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

Corporate bonds most often pay interest _____________.

semiannually (every six months)

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as a) term bonds b) serial bonds c) convertible bonds

A

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? a) Credit cash $5,000 b) Credit cash $6,000 c) Debit interest expense $12,000 d) Debit interest expense $10,000

A ($100,000 x 10% x 6/12)

Which of the following are correct regarding bonds? a) They obligate the issuing company to repay the bonds at a specific date. b) They obligate the issuing company to repay the bonds when market interest rates decrease. c) They obligate the issuing company to repay the bonds when interest rates increase. d) They obligate the issuing company to pay an estimated amount. e) They obligate the issuing company to pay a specific amount.

A & E

Callable bonds can be redeemed at the choice of a) the bondholder. b) the bond issuer. c) both the bond issuer and bondholder.

B

Financing with ____________ requires borrowing, whereas financing with _____________ requires issuing shares of stock.

debt; equity

A bond will be issued at a discount when the market rate of interest is a) less than the stated rate. b) the same as the stated rate. c) greater than the stated rate.

C

Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at: a) a premium b) the face amount c) a discount

C

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 ______. a) Bonds Payable; Cash b) Notes Payable; Cash c) Cash; Bonds Payable d) Cash; Bonds Receivable

C

Bonds will be issued a premium if the stated interest rate is a) equal to the market interest rate. b) greater than the market interest rate. c) less than the market interest rate. d) fluctuating on the day of issuance.

B

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? a) Debit to interest expense $3,211 b) Credit cash $4,000 c) Debit premium on bonds payable $789 d) Debit to interest expense $4,000 e) Credit to interest expense $3,211

A, B, & C

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) a credit to Cash of $500 b) a debit to Interest expense of $500 c) a credit to Cash of $6,000 d) a credit to Interest payable of $500 e) a debit to Interest expense of $6,000

B & D

in 2008, ABC Company issued $100,000 of 20-year bonds at face value. Ten years later, in 2018, the company retired the bonds early by purchasing them in the open market at $101,000. The entry to record this transaction includes ______. a) a debit to Loss on bond retirement of $1,000 b) a debit to Bonds payable of $100,000 c) a credit to Cash of $101,000 d) a credit to Gain on bond retirement of $1,000 e) a credit to Cash of $100,000 f) a debit to Bonds payable of $101,000

A, B, & C

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing: a) current assets b) net income c) current liabilities d) long-term liabilities

D

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? a) The debit to Interest Expense will be greater because the market rate is less than the stated interest rate. b) The debit to Interest Expense will be lower because the market rate is less than the stated interest rate. c) The debit to Interest Expense will be less because the market rate is greater than the stated interest rate. d) The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.

D

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

The early retirement of a bond includes ______. a) elimination of the liability b) increase in the liability c) recording of a gain or loss d) receipt of cash by the the company that issued the bonds e) payment of cash

A, C, & E

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? a) Credit discount on bonds payable $705 b) Debit interest expense $6,000 c) Credit cash $6,000 d) Credit cash $5,000 e) Debit interest expense $5,705

A, D, & E Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's: a) total assets b) long-term debt c) current liabilities d) net income

B

Which of the following statements is correct? a) Bonds can be retired only at maturity. b) Bonds may be retired at maturity or retired early. c) Bonds for which the effective interest rate rises must be retired early.

B

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? a) Debit to bonds payable $4,000 b) Debit to interest expense $3,211 c) Credit to interest expense $3,211 d) Debit to interest expense $4,000

B Semi-annual interest rate = 6%/2 = 3% x $107,020.

Periodic payments on installment notes typically include (Select all that apply.) a) installment fees. b) a portion that reflects interest. c) a portion that reduces the outstanding loan balance. d) an increase in stockholders' equity

B & C

Candy Corporation has $100,000 of 8% bonds that were issued in Year 1 at face amount. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries? a) Credit bonds payable $100,000 b) Credit cash $100,000 c) Debit cash $100,000 d) Debit bonds payable $100,000

B & D

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) a debit to Interest expense of $6,000 b) a debit to Interest expense of $500 c) a credit to Cash of $6,000 d) a credit to Cash of $500 e) a credit to Interest payable of $500

B & E

Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include: a) debit to Premium on Bonds Payable b) debit to Cash c) credit to Premium on Bonds Payable d) credit to Bonds Payable e) credit to Interest Revenue

B, C, & D

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include: a) A debit to loss on bond issuance b) A credit to discount on bonds payable for $2,000 c) A credit to bonds payable for $100,000 d) A debit to discount on bonds payable for $2,000

C & D

True or False: The bond sold at a discount because the stated rate of 10% is lower than the market rate of interest. The debit to Interest Expense will be greater because it is based on the market rate. The credit to Cash will be less because it is based on the lower stated interest rate.

True