SmartBook Ch 9
bonds are supported by a specific asset the issuer pledges as collateral.
Secured
bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
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
An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the date. (Enter only one word.)
maturity
Most bonds issued today are ______.
unsecured
The true interest rate used by investors to value a bond issue is referred to as the:
market interest rate
The rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)
stated
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
face amount.
Bonds will be issued at a premium if the stated interest rate is
greater than the market interest rate.
Loans requiring periodic payments of interest and principle are referred to as notes.
installment
If bonds are retired before the maturity date, this is considered a(n)
If bonds are retired before the maturity date, this is considered a(n)
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit standing of the issuer.
When a corporation repurchases its bonds from the bondholders, the corporation the bonds.
retires
Corporate bonds most often pay interest
semiannually
Katie Company issues $14 million in bonds. The bonds are well received by investors solely based on the excellent reputation and past performance of the company, its products, and its executives. Katie most likely is issuing a(n) bond.
unsecured
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. Reason: The 6% interest rate makes the bond more attractive and investors are willing to pay more.
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
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 credit to Interest payable of $500 - a debit to Interest expense of $500
Which of the following are common characteristics or provisions of bonds?
- convertible - secured or unsecured - callable - term or serial
Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:
- credit to Bonds Payable - debit to Cash - credit to Premium on Bonds Payable
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) placement.
private
A(n) bond is backed by a lien on specified real estate owned by the issuer.
secured
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
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:
$195,500
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.
$88,699 Reason: (5.65022 x $10,000) + (0.32197 x $100,000) = $88,699
The journal entry to recognize the signing of an installment notes payable includes:
- Debit Cash - Credit Notes Payable
Werner issues bonds at a discount. The related Discount account should be classified as a(n)
Blank 1: contra Blank 2: liability
Financing with requires borrowing, whereas financing with requires issuing shares of stock. (Enter one word per blank.)
Blank 1: debt Blank 2: equity
The rate of interest printed on the face of a bond is referred to as the interest rate. (Enter one word per blank)
Blank 1: stated, nominal, coupon, or face
Which of the following statements is correct?
Bonds may be retired at maturity or retired early
Mann Inc. issues $100,000 bonds at face amount. The bonds pay interest of 6%. Berkely Inc., a company with comparable risk, issues $100,000 bonds, paying 5% interest for $98,000 Which of the following is true?
Both bonds yield a return of 6% to investors.
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
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
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 discount.
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 premium
Convertible bonds allow the lender to convert each bond into:
common stock
The Discount on Bonds Payable account is classified as a(n)
contra-liability
bonds are retired when the bondholder exchanges them for the issuing company's stock.
convertible
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
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:
- Cash for $98,000 - Discount on bonds payable for $2,000
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
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 - Credit discount on bonds payable $705 Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705
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?
- Debit bonds payable $100,000 - Credit cash $100,000
Match each type of bond with its description.
- Secured: Bonds are backed by collateral - Callable bonds: The issuing company can pay off the bonds at any time - Convertible bonds: Bonds that can be exchanged for shares of stock in the issuing company - Term: Bond issue that matures on a single date - Serial bonds: Bonds that mature in installments
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.
True or false: When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.
- True Reason: The two components for pricing a bond are the interest payments and the repayment of principal.
Periodic payments on installment notes typically include (Select all that apply.)
- a portion that reduces the outstanding loan balance - a portion that reflects interest
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 carrying value at maturity is equal to the face amount of bonds issued at:
- face amount, discount, and premium
Which of the following are the most common types of bonds?
Unsecured
In a private placement of bonds, bonds may be sold to
a single large investor
Callable bonds can be redeemed at the choice of
bond issuer
A corporation that wishes to borrow from the general public rather than a bank will issue
bonds
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.
$92,278 Reason: (7.72173 x $8,000 x 0.5) + (0.61391 x $100,000) = $92,278
ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2021, 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, 2021 (rounded to the nearest dollar)?
$5,000
Katie Company has outstanding bonds due in four years. Katie Company regularly deposits money in an investment account; these accumulated funds will be used to pay off the bonds in four years. Katie apparently has a
sinking fund
The price of a bond includes
the present value of the face amount plus the present value of the periodic interest payments
Most corporate bonds pay interest
semiannually
An investment fund into which an organization makes payments each year over the life of its outstanding debt is referred to as a(n) fund.
sinking
Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as
term bonds
The two types of financing are
- equity financing - debt financing
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
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
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 credit to Bonds payable of $100,000 - A debit to Cash of $110,000. - A credit to Premium on Bonds Payable of $10,000
Match the bonds with the effect on the bond-related interest expense.
- Discounted bonds: interest expense increases each interest period - Premium bonds: interest expense decreases each period
Match each bond issue with the changes over time to the bonds' carrying value.
Issued at face amount - Carrying value does not change and is equal to issue price 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
A bond will be issued at a discount when the market rate of interest is
greater than the stated rate
For a bond issued at a discount, the stated interest rate will be than its yield or return earned by bond investors.
lower
The rate of interest is an implied rate based on the price investors pay to purchase a bond. (Enter one word per blank)
market
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased
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
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?
- The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.
Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:
- A debit to discount on bonds payable for $2,000 - A credit to bonds payable for $100,000
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:
- Bonds payable of $100,000 - Less discount on bonds payable of $1,200
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?
- Credit cash $200,000 - Debit bonds payable $200,000
