Week 7/Ch.14 (part 2)

Bonds are securities that can be readily bought and sold. A bond issue consists of a number of bonds, usually in denominations of ______ or _____ and is sold to many different lenders.

$1,000; $5,000

A(n) _______ is a legal agreement that helps to protect a lender if a borrower does not make required payments on notes or bonds. This agreement gives the lender the right to be paid from the cash proceeds of the sale of the borrower's assets, as identified in the agreement.

mortgage

Star Bank provided cash to a customer, J. Brown, to pay for a building. Star required that Brown also sign a(n) ______ (mortgage/installment/bond) note payable, which allows the bank to be paid by the cash proceeds of the sale of the building if Brown fails to pay on the note.

mortgage

A _____ _____ is similar to a bond payable but is normally transacted with a single lender such as a bank.

note payable

_______ bonds (and notes), also called debentures, are backed by the issuer's general credit standing.

unsecured

A company issues $100,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate the present value factor of an annuity for 3% at 10 periods is 8.5302; and for 4% at 10 periods is 8.1109. To find the present value of the interest payments, multiply _______ by the present value factor _________.

$3,000; 8.1109 Interest payment = $100,000 x 6% x 1/2 = $3,000. Present value=1/2 of the market rate (4%) and double the number of periods (10).

Since bond market values are expressed as a percentage of their bond value, a $1,000 bond that is sold at 93 will trade at $

$930

A company issues $500,000 of 9%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $480,000, yielding a discount of $20,000. Using the straight-line amortization method, the company will amortize the discount by ________ on each semiannual interest payment.

1,000

A $200,000 4 year bond was issued for $210,000. The semi-annual amortization of the bond premium using the straight-line method equals $______

1,250

A company borrows $50,000 by signing a $50,000, 8% note that requires six equal payments of ______ (round to the nearest dollar) at the end of each year. (The present value of an annuity of six annual payments, discounted at 8% equals 4.6229.)

10,816

A company borrows $50,000 by signing a $50,000, 8% note that requires six equal payments of ______(round to the nearest dollar) at the end of each year. (The present value of an annuity of six annual payments, discounted at 8% equals 4.6229.)

10,816

A company issues $50,000 of 5%, 10-year bonds dated January 1 and pay interest semiannually on June 30 and December 31 each year. The bonds are sold for $48,000. Using the straight-line amortization method, the company will amortize the discount by $______ on each semiannual interest payment.

100

A company issues $100,000 of 12%, 6-year bonds that pay interest semiannually. The bonds are issued when the market rate is 10%. The present value of an annuity table indicates that the present value factor for 5% at 12 periods is 8.8633. The present value of 1 table indicates that the present value factor for 5% at 12 periods is 0.5568. The present value of the price of the bond rounded to the nearest whole dollar is $______

108,860

A company issued $50,000 of 8%, 10-year bonds on January 1. The bonds pay semi annual interest. The present value factor of a single amount of 20 periods at 8% is 0.2145.The present value of 10 periods at 4% is 0.6756. The present value of 20 periods at 4% is 0.4564. Determine the present value of the par value of the bonds.

22,820

A company borrows $100,000 by signing a $100,000, 5% note that requires four equal payments of $______ (round to the nearest dollar) at the end of each year. (The present value of an annuity of four annual payments, discounted at 5% equals 3.5460.)

28,201

A company issues $100,000 of 10%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate that the present value factor for 3% at 5 periods is 0.8626; for 3% at 10 periods is 0.7441; for 4% at 5 periods is 0.8219 and for 4% at 10 periods is 0.6756. The present value of the par value of the bond is:

67,560 $100,000 x 0.6756=67,560.

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $______

8,179

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by:

9,542 $15,142-5,600=$9,542.

Which of the following statements are disadvantages of bond financing? (Check all that apply.)

Bonds can decrease return on equity. Bonds require payment of interest and par value.

Which of the following statements is an advantage of bond financing?

Bonds do not affect owner control.

Which of the following statements is not an advantage of bond financing?

Bonds require interest payments and payment of par value.

Which of the following is a disadvantage of bond financing?

Bonds require payment of periodic interest and the par value.

A company issues $500,000 of 6%, 10-year bonds dated January 1, 2017 that mature on December 31, 2026. The bonds pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the sale with which of the following entries?

Debit to Cash $500,000; and credit to Bond Payable $500,000.

A company issues $50,000 of 9%, 10-year bonds dated January 1, 2019, that mature on December 31, 2028, and pay interest semiannually for $2,250. On December 31, 2023, when the bond premium is $2,500, the bonds are called for $52,000. The journal entry to record this transaction would record a (Gain/Loss) ______ on bond retirement in the amount of ______.

Gain; $500

A company issues $100,000 of 5%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the first semi-annual interest payment with a debit to which of the following accounts and in what amount?

Interest Expense, $2,500

A company borrows $60,000 by signing a $60,000, 8%, 6-year note that requires equal payments of $12,979 at the end of each year. The first payment will record interest expense of $4,800 and will reduce principal by $8,179. The journal entry to record this payment will include a debit to which of the following accounts and in what amount? (Check all that apply.)

Notes Payable; $8,179 Interest Expense; $4,800

A company borrows $70,000 by signing a $70,000, 8%, 6-year note that requires equal payments of $15,142 at the end of each year. The first payment will record interest expense of $5,600 and will reduce principal by $9,542. The journal entry to record this transaction will include a debit to which of the following accounts and for how much? (Check all that apply.)

Notes Payable; $9,542 Interest Expense $5,600

The bond carrying value can be determined by which of the following formulas?

Par value - discount on bonds payable

Market rates help determine the selling price of bonds. Identify which scenarios should be matched together.

Premium- Contract rate is greater than the market rate Discount- Contract rate is less than the market rate Par- Contract rate is equal to market rate

The legal contract between the bondholders and the issuer is called the bond ______

The legal contract between the bondholders and the issuer is called the bond

Forever, Inc. announces an offer to issue bonds with a $100,000 par value, an 8% annual contract rate (paid semiannually) and a two-year life. The market rate is 10%, so the bonds will be sold at:

a discount

Most bonds require par value to be repaid _______ and interest to be paid _________.

at the maturity date; semiannually

Bonds payable to whomever holds them are called _____ bonds or unregistered bonds.

bearer

_____ bonds (and notes) have an option exercisable by the issuer to retire them at a stated dollar amount before maturity.

callable

A company issues $100,000 of 5%, 10-year bonds dated January 1. The bonds pay interest semiannually on June 30 and December 31 each year. If the bonds are sold at par value, the issuer records the sale with a debit to ______ in the amount of $______.

cash 100,000

A company issues $50,000 of 8%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the first semi-annual interest payment with a credit to______ in the amount of $______

cash 2,000

A company issues $75,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the payment of principal at maturity with a credit to ______ in the amount of $______.

cash 75,000

A bond ______ is evidence of the company's debt.

certificate

A bond _________ may be issued as evidence of the company's debt.

certificate

The ________ rate is the interest rate specified, sometimes referred to as the coupon rate, stated rate, or nominal rate.

contract

_____ bonds (and notes) can be exchanged for a fixed number of shares of the issuing corporation's common stock.

convertible

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $98,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Bonds Payable in the amount of $______

credit 100,000

y issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Bond Payable in the amount of _______.

credit 100,000

When the market rate is 10%, a company issues $60,000 of 12%, 10-year bonds and pay interest semiannually. When the bonds mature, the issuer records its payment of principal with a (debit/credit)______ to Cash in the amount of $______

credit 60,000

A company issues $80,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $84,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to (Discount/Premium) ______ on Bonds Payable in the amount of $4,000.

credit premium

A company issues $80,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $84,000 for the bonds, the issuer will record the sale with a (debit/credit)______ to (Discount/Premium)______ on Bonds Payable in the amount of $4,000.

credit premium

A company issues $100,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $103,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Bond Payable in the amount of _______.

credit; $100,000

A company issues $90,000 of 6%, 10-year bonds dated January 1 that pay interest semiannually on each June 30 and December 31. If the issuer accepts $85,000 for the bonds, the issuer will record the sale with a (debit/credit) ______ to Discount on Bonds Payable in the amount of $______

debit 5,000

When the market rate is 8%, a company issues $50,000 of 9%, 10-year bonds and pay interest semiannually for a selling price of $60,000. When the bonds mature, the issuer records its payment of principal with a (debit/credit)______ to Bonds Payable in the amount of $______

debit 50,000

A company issues $90,000 of 9%, 10-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If bonds are sold at par value, the issuer records the payment of principal at maturity with a (debit/credit) ________ to bond payable in the amount of _______.

debit; $90,000

A company issues $90,000 of 5%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $95,000 for the bonds, the $5,000 premium on bonds payable will ________ total interest expense recognized over the life of the bond.

decrease

When a bond is sold at a premium, the carrying value will _______ each period that the premium is amortized.

decrease

A company issues $60,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually on June 30 and December 31 each year. If the issuer accepts $62,000 for the bonds, the premium on bonds payable will (increase/decrease)______ total interest expense recognized over the life of the bond by $______

decrease 2,000

A(n) ______on bonds payable occurs when a company issues bonds with a contract rate less than the market rate.

discount

When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a (premium/discount)______

discount

Total bond interest ______ is the sum of the interest payments plus the bond discount.

expense

The legal contract between the bondholders and the issuer is called the bond ______.

indenture

A company borrows $60,000 from a bank to purchase equipment. It signs an 8% note requiring six annual payments of principal plus interest. This is an example of a(n)______ note.

installment

A(n) _____ note is an obligation requiring a series of payments to the lenders.

installment

The straight-line bond amortization method allocates an equal portion of the total bond ______ ______ to each interest period.

interest expense

A bond discount increases __________ at each semi-annual interest payment.

interest expense

A company issues $50,000 of 9%, 10-year bonds dated January 1, 2019, that mature on December 31, 2028, and pay interest semiannually for $2,250. On December 31, 2023, when the bond premium is $2,500, the bonds are called for $54,000. The journal entry to record this transaction would record a (Gain/Loss) ______ on Bond Retirement in the amount of ______.

loss 1,500

The bond's _______ rate of interest is the rate that borrowers are willing to pay and lenders are willing to accept for a particular bond and its risk level.

market

The rate that borrowers are willing to pay and lenders are willing to accept for a particular bond at its risk level is called the bond's ______ rate.

market

The par value of a bond, also called the face value, is paid at a stated future date, known as the bond's ______ date.

maturity

Lyle Co. borrowed $20,000 from First Bank by signing a written promise to pay a definite sum of money on a specific future date. Lyle will record this in the general ledger as a(n) ______ payable

notes

The ________ value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's maturity date.

par

The bond carrying value can be determined by taking the bond ______ value minus the discount on bonds payable.

par

The bond contract rate determines the annual interest paid by multiplying the bond ______ value by the contract rate.

par

Most bonds require (interest/par) ______ value to be repaid at maturity and (interest/par) ______ to be paid semiannually.

par interest

When the contract rate of the bonds is higher than the market rate, the bond sells at a higher price than par value. The amount by which the bond price exceeds par value is the _______ on bonds.

premium

When the market rate is less than the bond contract rate on the date of issuance, the bonds will be sold at a (discount/premium)______

premium

Bonds issued in the names and addresses of their holders are _______ bonds.

registered

_______ bonds (and notes) have specific assets of the issuer pledged (or mortgaged) as collateral.

secured

_______ bonds (and notes) mature at more than one date (often in series) and, thus, are usually repaid over a number of periods.

serial

Many bonds are (sinking/secured)______ fund bonds, which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

sinking

Many bonds are _______, which reduces the holder's risk by requiring the issuer to set aside assets at specified amounts and dates to repay the bonds.

sinking fund bonds

The ________ bond amortization method allocates an equal portion of the total bond interest expense to each interest period.

straight-line

_____ bonds (and notes) are scheduled for maturity on one specified date.

term