chapter 9 smartbook
The two types of financing are...?
1) equity financing 2) debt financing
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?
Answer: The issue price will be above the bond's face value. As to why it is NOT the other choices: - The issue price will equal the bond's face value (reason the 6% interest rate makes the bond more attractive and investors are willing to pay more) - The issue price will be below the bond's face value (Reason: the 6% interest rate makes the bond more attractive and investors are willing to pay more)
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 Reason: $100,000 x 10% x 6/12
The rate of interest printed on the face of a bond is referred to as the _____ interest rate.
Face; stated, nominal, coupon, or face
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False - This is because the debt to equity ratio is total liabilities divided by total stockholders' equity
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 - It is not true because the stated rate is not always equal to the market rate of interest
A bond will be issued at a discount when the market rate of interest is...?
Greater than the stated rate
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 bond will be issued at a premium when the market rate of interest is ______ the stated rate.
Less than
A corporation that wishes to borrow from the general public rather than a bank will issue...?
bonds
Loans requiring periodic payments of interest and principle are referred to as ______ notes.
installment
The _____ rate of interest is an implied rate based on the price investors pay to purchase a bond.
market
The _____ rate of interest is used to compute the cash interest paid to bondholders.
stated
The debt to equity ratio is calculated as...?
total liabilities divided by total stockholders' equity
Bonds will be issued a premium if the stated interest rate is...?
greater than the market interest rate.
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
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 debit to Cash of $110,000. - A credit to Premium on Bonds Payable of $10,000 - A credit to Bonds payable of $100,000
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 ______.
The correct answer is Cash; Bonds Payable reasons why it is not others: - It is not cash; bonds receivable because the entry to record the issuance of bonds includes a debit to Cash and a credit to Bonds Payable. Bonds Receivable would not be credited unless you had previously loaned money and are getting paid back. - And it is not notes payable; cash because the entry to record the issuance of bonds includes a debit to Cash and a credit to Bonds Payable.
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
Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at
a premium
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.
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
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?
- Credit cash $4,000 (Reason: semi-annual interest rate = 6%/2 = 3% x $107,020) - Debit premium on bonds payable $789 (Reason: semi-annual interest rate = 6%/2 = 3% x $107,020) - Debit to interest expense $3,211 (Reason: semi-annual interest rate = 6%/2 = 3% x $107,020)
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 - Debit interest expense $5,705 (Reason: Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705) - Credit discount on bonds payable $705 (Reason: Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705)
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 reason as to why it is not others: - A credit to cash of $500 -> Reason: The interest payment will be made on December 31, not January 31. - A debit to interest expense of $6000 -> Reason: Interest expense=$100,000x6%x(1/12)=$500 (1/12) = $500 - A credit to cash of $6000 -> Reason: The interest payment will be made on December 31, not January 31.
Periodic payments on installment notes typically include...?
- a portion that reflects interest. - a portion that reduces the outstanding loan balance.
Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:
- credit to Premium on Bonds Payable - debit to Cash - credit to Bonds Payable
Financing with _____ requires borrowing, whereas financing with _______ requires issuing shares of stock
- debt - stock
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 ______.
answer: - a credit to Cash of $6,000 - a debit to Interest expense of $6,000 Reasoning as to why it was not these other choices: - Debit to interest payable of $6000: reason is because since no previous adjusting entry was recorded to accrue interest, there would be no Interest payable balance to decrease. The debit is to Interest expense and a credit to Cash for $6,000. - A credit to interest expense of $6000; the reason is because interest expense should be debited, not credited. The credit is to Cash.
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 to interest expense $3,211 (Reason: semi-annual interest rate = 6%/2 = 3% x $107,020)
Which of the following are correct regarding bonds?
- They obligate the issuing company to pay a specific amount. - They obligate the issuing company to repay the bonds at a specific date.
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
