MGMT 200 UNIT 3 (Chapter 9, Chapter 10)

Periodic payments on installment notes typically include

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

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

secured

Most corporate bonds pay interest

semiannually.

Another common term for stockholders' equity is:

shareholders' equity

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

XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company?

$5,000 current note payable; $45,000 long-term note payable

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

secured

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

a single large investor.

Financing with ________________requires borrowing, whereas financing with_________________ requires issuing shares of stock.

debt equity

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__________________is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

lease

In the U.S., the most popular method for financing corporate long-term assets is:

leasing

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000

Which of the following are included in the duties of the board of directors?

Appoint officers to manage the corporation. Establish corporate policies.

serial bonds

Bonds that mature in installments

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

Which of the following are possible benefits of leasing an asset rather than purchasing an asset?

Improvement in cash flows Lower periodic payments on the asset Protection against declining asset value

Which of the following are included in the rights of common stockholders?

Right to vote on certain matters.

Which of the following are typically shown in an amortization schedule related to an installment notes payable?

The cash paid each payment period The carrying value of the note at the beginning of the period The carrying value of the note at the end of the period

callable bonds

The issuing company can pay off the bonds at any time

Which of the following are the most common types of bonds?

Unsecured

When is it more economical for a company to borrow funds by issuing bonds?

When the interest savings exceed the additional bond issuance costs.

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

A corporation that wishes to borrow from the general public rather than a bank will issue

bonds

The mixture of debt financing and equity financing a company uses is referred to as the company's_____________structure.

capital

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 ______.

cash bonds payable

Limited liability and ease of raising outside capital are advantages of this business form:

corporation

Smith Company enters into a lease agreement with Rent-All Corp. The present value of the lease payments is equal to $25,000. Smith records:

credit lease payable $25,000 debit lease asset $25,000

Western Company enters into a lease agreement with ABC Rents. The present value of the lease payments is equal to $50,000. Western records:

debit lease asset $50,000; credit lease payable $50,000

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

debt

____________financing refers to borrowing money from creditors.

debt

Common terms used for the market interest rate are:

effective interest rate yield rate

In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:

equity

Loans requiring periodic payments of interest and principle are referred to as_______________notes.

installment

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

interest expense for $4,000. notes payable for $1,120.

An advantage to financing with debt is that

interest is tax deductible

Debt is considered a lower cost method of financing than equity because

interest on debt is tax deductible.

______________capital is the amount of money paid into a company by its owners.

paid-in

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

private

Corporate bonds most often pay interest ___________________

semiannually

Shareholders' equity is another common term for ___________equity

stockholders

Bonds that mature on one specific date are called_______________bonds, whereas bonds that mature in installments are referred to as____________bonds.

term serial

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

term or serial convertible secured or unsecured

A corporation will issue bonds when

the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan.

Most bonds issued today are ______.

unsecured

The two types of financing are

equity financing. debt financing.

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

false

Bonds and leases are normally classified as ______ liabilities.

long-term

The journal entry to recognize the signing of an installment notes payable includes:

Credit Notes Payable Debit Cash

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880.

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 credit to Cash of $6,000 a debit to Interest expense of $6,000

Improved cash flows is a common advantage of acquiring equipment through__________

leasing

A company's capital structure refers to

the mixture of debt and equity used to finance the company.

At the beginning of a lease period, the lessee records

a lease asset and lease payable for the present value of the lease payments.

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company records:

a lease payable a lease asset

The_____________rate of interest is used to compute the cash interest paid to bondholders.

stated

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:

$8,600

term

Bond issue that matures on a single date

secured

Bonds are backed by collateral

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?

Interest expense based on the beginning period carrying value and the effective rate of the loan The decrease in the carrying value of the note The cash paid each payment period The carrying value of the note at the end of the period

convertible bonds

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

Which of the following are methods of long-term financing with debt?

Notes payable Bonds Leases

__________________financing refers to obtaining investment from stockholders.

equity

______________________has grown into the most popular method of external financing of corporate assets in America.

leasing

A corporate charter:

names the board of directors. specifies the shares of stock to be issued. describes the business activities.

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:

credit to Notes Payable for $24,000

_____________financing refers to obtaining investment from stockholders.

equity

The amount of money paid into a company by its owners is referred to as:

invested capital