MGMT 200 - Chapter 9

Type of bond? bond issue matures on a single date

term

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

term

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are: a. convertible b. secured c. unsecured

b

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 7%, the bonds will issue at a. face amount. b. a premium. c. a discount.

c

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.

false

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

Bonds that mature on one specific date are called ________ bonds, whereas bonds that mature in installments are referred to as ________ bonds.

term, serial

Type of bond? bonds are not backed by collateral

unsecured

Financing with ________ requires borrowing, whereas financing with ________ requires issuing shares of stock. (Enter one word per blank.)

debt, equity

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

a, b, e

Which of the following are common characteristics or provisions of bonds? a. convertible b. secured or unsecured c. perpetual or periodic d. free or redeemable e. callable

a, b, e

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

c

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) a. maturable asset. b. common stock. c. bond. d. obligation payment.

c

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

c

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

c

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

c

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

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

higher

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

installment

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by ________ ________ . (Enter one word per blank)

interest expense

Type of bond? bonds are backed by collateral

secured

________ bonds are supported by a specific asset the issuer pledges as collateral.

secured

Corporate bonds most often pay interest ________.

semiannually

Type of bond? bond issue matures in installments

serial

The rate of interest printed on the face of a bond is referred to as the ________ interest rate. (Enter one word per blank)

stated

A series of equal amounts paid or received over equal time periods is called a(n) ________ .

annuity

When a corporation repurchases its bonds from the bondholders, the corporation ________ the bonds.

retired

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

On January 1, 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. Round your answer to the nearest dollar. a. $92,278 b. $92,418 c. $100,196 d. $100,000

a

Identify the characteristics of an annuity. a. A series of amounts that vary from period to period b. Varying time periods between payment dates c. Equal time periods between payment dates d. A series of amounts that are equal

c, d

Type of bond? issuing company can pay off bonds early

callable

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ________ placement.

private

The ________ rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)

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. contingent contract. c. direct purchase plan. d. indenture.

a

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.

a

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. convertible bonds c. serial bonds

a

The true interest rate used by investors to value a bond issue is referred to as the: a. market interest rate b. prime interest rate c. nominal interest rate d. stated interest rate

a

Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a discount. At end of the current fiscal period, unamortized bond discount is $1,200. The balance sheet presentation of Cabot's bonds should include: a. Less discount on bonds payable of $1,200 b. Bonds payable of $100,000 c. Carrying value of $101,200

a, b

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

a, b

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

a, d

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 pay an estimated amount. c. They obligate the issuing company to repay the bonds when market interest rates decrease. d. They obligate the issuing company to pay a specific amount. e. They obligate the issuing company to repay the bonds when interest rates increase.

a, d

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

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

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

b, d

The debt to equity ratios for three otherwise comparable companies are as follows: Adams: 1.5; Flagler: 1.8; Roberts: 1.4. The risk of bankruptcy appears to be lowest for: a. Adams b. Flagler c. Roberts

c

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. a. future value; stated b. present value; stated c. present value; market d. future value; market

c

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. a. $95,056 b. $100,000 c. $88,699 d. $93,643

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. net income b. current assets c. long-term liabilities d. current liabilities

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. Cash; Bonds Receivable c. Cash; Bonds Payable d. Notes Payable; Cash

c

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 debit to discount on bonds payable for $2,000 d. A credit to bonds payable for $100,000

c, d

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

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 are common characteristics or provisions of bonds? a. secured or unsecured b. indefinite or redeemable c. convertible d. term or serial e. perpetual or periodic

a, c, d

Which of the following are common characteristics or provisions of bonds? a. secured or unsecured b. perpetual or periodic c. callable d. free or redeemable e. convertible

a, c, e

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

a

In a private placement of bonds, bonds may be sold to a. a single large investor. b. an underwriter who sells it to individual investors. c. the general public.

a

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at a. a premium. b. face amount. c. a discount.

a

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

a

The debt to equity ratio is calculated as a. total liabilities divided by total stockholders' equity. b. long-term debt divided by total stockholders' equity. c. noncurrent liabilities divided by current liabilities + stockholders' equity. d. current liabilities divided by total stockholders' equity.

a

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 6%, the bonds will issue at a. a discount. b. face amount. c. a premium.

b

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be: a. $4,500 b. $195,500 c. $204,500 d. $200,000

b

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 a. $260,000. b. $200,000. c. $212,000.

b

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as: a. business risk b. default risk c. bonds payable risk d. investment risk

b

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

b, e

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

c, d

Werner issues bonds at a discount. The related Discount account should be classified as a(n) ________ - ________ .

contra liability

Type of bond? investor can convert bonds to common stock

convertible

_________ bonds are retired when the bondholder exchanges them for the issuing company's stock. Confidence Level

convertible

The Discount on Bonds Payable account is classified as a(n) a. asset. b. loss. c. expense. d. contra-liability.

d

The carrying value at maturity is equal to the face amount of bonds issued at: a. discount and premium only b. face amount only c. face amount and discount only d. face amount, discount, and premium e. face amount and premium only

d

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

d, e

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. (Enter one word per blank)

lease