Chp. 9 SB

Term

Bond issue that matures on a single date

Convertible bonds

Bonds that can be exchanged for shares of stock in the issuing company

Serial bonds

Bonds that mature in installments

Issued at a premium

Carrying value decreases over time and is equal to face amount at maturity

Issued at a discount

Carrying value increases over time and is equal to face amount at maturity

Premium bonds:

Interest expense decreases each interest period

Discounted bonds:

Interest expense increases each interest period

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

The Discount on Bonds Payable account is classified as a(n)

contra-liability

The return on assets measures the amount of ______, ______, or _______ generated for each dollar of assets.

income, profit, or earnings

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased.

Neumann Corporation is planning to issues bonds with a face amount of $2 million. If Neumann's accountant, Betty, wants to calculate the expected issue she should calculate the ____ of the related future cash payments using the ____ interest rate.

present value; market

Callable bonds can be redeemed at the choice of

the bond issuer

Issued at face amount

Carrying value does not change and is equal to issue price

Identify two ratios commonly used to assess a company's financial risk:

Debt to equity ratio Times interest earned ratio

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.

Periodic payments on installment notes typically include...

a portion that reflects interest, a portion that reduces the outstanding loan balance.

In a private placement of bonds, bonds may be sold to

a single large investor

Secured

bonds are backed by collateral

True or false: The times interest earned formula is net income divided by interest expense.

false

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

financial

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate.

The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.

higher

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long-term debt

Callable bonds

the issuing company can pay off the bonds at any time

On January 2, 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

The debt to equity ratio is calculated as

Total liabilities divided by total stockholders'

Corporate bonds most often pay interest

semiannually

What is the most common type of bonds?

unsecured

Identify the characteristics of an annuity:

- Equal time periods between payment dates-A series of amounts that are equal

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 -Credit discount on bonds payable $705 -Debit interest expense $5,705

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

Which of the following are common characteristics or provisions of bonds?

-secured or unsecured -term or serial -convertible -callable

Which of the following financial ratios provides information about the income generated per dollar of assets?

Return on assets

Financing with ____ requires borrowing, whereas financing with _____ requires issuing shares of stock.

debt; equity

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate

Omar Inc. has 6%, $200,000 face amount of bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, the unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:

$195,500

On Janurary, year 1, ziegler issued 5-year bonds with a stated rate of 8% and a face amount of $100,000. the bonds pay interest semiannually. The market rate of interest was 10%. calculate the issue price of the bonds.

$92278

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

$93,643

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

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.

If bonds are retired before the maturity date, this is considered a(n)

early extinguishment of debt.

The two types of financing are

equity financing and debt financing

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

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

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

A credit to bonds payable for $100,000, A debit to discount on bonds payable for $2,000, Cash for $98,000

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

installment

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

Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value is equal to face amount at the ______ date.

maturity

Which of the following is true regarding a debenture bond?

It is secured by the faith and credit standing of the issuer.