SmartBook Chapter 14
Bond issue costs typically are incurred related to:
both privately placed and publicly sold bonds
Margot, an accounting student, tries to determine whether a bond sells at a premium, discount, or face amount. Margot can determine whether the bond sells at a premium, discount, or face amount
by comparing the effective and stated interest rates.
If a company can earn a return on borrowed funds in excess of the cost of borrowing, the funds the company achieves:
favorable leverage.
On January 1, 20X1, Water Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will
increase by $354.
Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit
notes payable
Zero-coupon bonds typically issue at a deep discount because they
pay no interest
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as______________ coupon bonds.
zero
The primary purpose of the call feature associated with bonds is to
protect the issuer against declining interest rates.
Walker Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The market value of the bonds is $10.2 million. If the company chose the fair value option, the bonds should be reported at
$10,200,000.
What are the advantages of financing with long-term debt? (Select all that apply.)
-A company may earn a greater return than the cost of borrowing the funds. -Interest is tax deductible.
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.)
-Including a call feature when the bonds are issued. -Purchasing bonds on the open market.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.)
-The warrants can be sold by the bondholder to another investor. -The warrants can be exercised separately from the bonds.
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.
Which of the following are valid valuation methods for reporting bonds payable? (Select all that apply.)
Amortized cost Current Fair value on each reporting date
Which of the following is correct regarding the effective interest method?
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt
Zero-coupon bonds typically issue at a deep discount because they Multiple choice question. -are high risk bonds -offer a high interest rate -offer a low interest rate -pay no interest
Pay no interest
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic.
Periodic interest is incurred
Installment loan
Periodic payment includes interest and a portion that reduces the outstanding loan.
Burns Company issues bonds for their face amount of $2 million. Over the life of the bonds, the company pays a total of $3.2 million to bondholders. What can you deduce from these facts regarding the difference between the face amount and the bonds' cash flows?
The $1.2 million represents the time value of money.
What is the primary reason why the issue price of a bond differs from the cash flows associated with the bond subsequent to its issuance?
The difference represents the time value of money.
Norton Company is planning to sell $5 million face bonds and engages the services of an underwriter. Which of the following statements is correct regarding the underwriter?
The underwriter bears the risk associated with being able to sell the bonds to individual investors.
Which of the following represents an important difference between bonds with detachable warrants and convertible bonds?
The warrants can be separated from the bonds.
When issuing bonds, corporations usually sell an entire issue to an________rather than selling bonds directly to the public.
Underwriter
Gruenwald Corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at the
present value of the cash payments using a 7% interest rate.
A company that recognizes a long-term notes payable has signed the legal document referred to as a__________________ note.
promissory
Today, most bonds issued are
registered bonds
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to Multiple choice question. -reacquire the bonds when interest rates fall. -pay interest if the company is profitable. -repay a certain amount at a date to be determined in the future. -repay a certain amount at a specific date. -reacquire the bonds when interest rates rise.
repay a certain amount at a specific date.
Installment notes typically involve the purchase of assets and (Select all that apply.)
require installment payments over time. periodic payments include principal and interest.
An early extinguishment of debt refers to long-term liability such as bonds that are
retired prior to maturity
Jennifer, an Intermediate Accounting student, wants to determine whether a particular bond issue will sell at face amount, a premium, or discount without calculating the actual issue price. Jennifer should compare the ____ and the ____.
stated interest rate; market interest rate
