Accounting Chapter 9 Learnsmart
________________ bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
A bond with an issue price of $10,100 and a face value of $10,000 was issued at ______.
a premium
The bond amortization schedule of Kroken Company shows that cash paid for interest exceeds interest expense. From this information we can infer that the bonds were issued at:
a premium
Werner issues bonds at a discount. The related Discount account should be classified as a(n) _______________ -______________
contra liability
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of __________________ risk.
financial
The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.
higher
The return on assets measures the amount of _______________ generated for each dollar of assets. (Enter only one word.)
income
Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:
long-term liabilities
The true interest rate used by investors to value a bond issue is referred to as the:
market interest rate
Most corporate bonds pay interest
semiannually.
The ____________ rate of interest is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense. (Enter one word per blank)
stated
The rate of interest printed on the face of a bond is referred to as the _________________ interest rate. (Enter one word per blank)
stated
Callable bonds can be redeemed at the choice of
the bond issuer.
The price of a bond includes
the present value of the face amount plus the present value of the periodic interest payments
Bonds that systematically mature over a series of years are called ______________ bonds.
serial
Margot Inc. issues $10 million in bonds, of which $2 million are due each year for the next 5 years. Margot Inc.'s bonds are commonly referred to as a
serial bonds
Identify the correct statement(s) relating to common bond features.
Bonds may be issued with both a call and a conversion feature Call features are more common than conversion features
The bond amortization schedule of Crocus Company shows that the carrying value of the bonds increased each interest period. From this information we can infer that the bonds issued at:
a discount
Periodic payments on installment notes typically include (Select all that apply.)
a portion that reduces the outstanding loan balance. a portion that reflects interest.
The Discount on Bonds Payable account is classified as a(n)
contra-liability.
A bond will be issued at a discount when the market rate of interest is
greater than the stated rate.
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. (Enter one word per blank)
stated market
The _______________ rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)
stated
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
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
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:
Discount on bonds payable for $2,000 Cash for $98,000
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
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False
ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, 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, 2018 (rounded to the nearest dollar)?
$5,000 (Reason: Payment to bondholders = $100,000 x 10% x (6/12) = $5,000; Interest expense is $5,537 (=92,280 x 12% (6/12)). The difference of $537 is the amortization of the discount.)
Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:
A credit to bonds payable for $100,000 A debit to discount on bonds payable for $2,000
Which of the following statements is correct?
Bonds may be retired at maturity or retired early.
Which of the following information is typically shown in a bond amortization schedule?
Cash paid Interest expense Carrying value of the bonds
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
You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0
Company D
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)
The _____________ rate of interest is an implied rate based on the price investors pay to purchase a bond. (Enter one word per blank)
market
The terms "effective interest rate" and "yield rate" refer to the ____________ interest rate.
market
Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at
a premium.
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.
Market rates of bonds vary depending on the ______________ risk of the company issuing the bonds.
default
A bond that sells for less than its face amount is sold at a(n) _____________.
discount
Bonds will be issued a premium if the stated interest rate is
greater than the market interest rate.
A bond will be issued at a premium when the market rate of interest is ______ the stated rate.
less than
A common reason for redeeming a bond prior to its maturity date is that
market interest rates decreased.
An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the _________________ date. (Enter only one word.)
maturity
When a corporation repurchases its bonds from the bondholders, the corporation ______________ the bonds.
retired
A(n) __________________ bond is backed by a lien on specified real estate owned by the issuer.
secured
Bonds that are backed by collateral are ______.
secured
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
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
________________ bonds are retired when the bondholder exchanges them for the issuing company's stock.
Convertible
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
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:
long-term debt
Tyler wants to calculate the issue price of bonds. He already knows the face amount and interest payment amount. He also needs to know the
number of periods to maturity.
A bond that sells for more than its face amount is sold at a(n) _______________.
premium
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.
present value; market
Corporate bonds most often pay interest ____________.
semiannually
Bonds that mature on one specific date are called _____________ bonds, whereas bonds that mature in installments are referred to as _____________ bonds.
term serial
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
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
Which of the following financial ratios provides information about the income generated per dollar of assets?
Return on assets
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:
Roberts
________________ bonds are supported by a specific asset the issuer pledges as collateral.
Secured
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
Financing with ______________ requires borrowing, whereas financing with ______________ requires issuing shares of stock. (Enter one word per blank.)
liabilities equity
Bonds may issue at:
a discount face amount a premium
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
$200,000.
On January 2, 2018, Schneider 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. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest recognized on June 30, 2018, using the effective interest method, will be equal to (round to the nearest full dollar)
$3,354. (Reason: 95,842 x 0.035)
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)
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)
On January 1, Year 1, Saturn Corporation issues $100,000 of bonds with a stated rate of 8% for $107,020. The bonds pay interest on June 30 and December 31. The market interest rate at the issue date was 6%. The journal entry to record the interest expense on June 30 will include which of the following?
Debit to interest expense $3,211 (Reason: Semi-annual interest rate = 6%/2 = 3% x $107,020.)
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. (Reason: The bond sold at a discount because the stated rate of 10% is lower than the market rate of interest. The debit to Interest Expense will be greater because it is based on the market rate. The credit to Cash will be less because it is based on the lower stated interest rate.)
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.)
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.
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 two types of financing are
debt financing. equity financing.
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
The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:
default risk
If bonds are retired before the maturity date, this is considered a(n)
early extinguishment of debt.
Common terms used for the market interest rate are:
effective interest rate yield rate
Which of the following information is necessary to calculate the issue price of bonds?
face amount of bonds interest payment each period number of periods to maturity
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.
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 Premium on Bonds Payable of $10,000 A debit to Cash of $110,000. A credit to Bonds payable of $100,000
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit standing of the issuer.
Match the interest rates with the related bond prices. 6% stated interest rate and 4% market interest rate <-> 6% stated interest rate and 6% market interest rate <-> 6% stated interest rate and 8% market interest rate <->
Premium - Investors will pay more than face value Investors will pay face value Discount - Investors will pay less than face value
Identify two ratios commonly used to assess a company's financial risk.
Debt to equity ratio Times interest earned ratio
True or false: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.
False
True or false: The times interest earned formula is net income divided by interest expense.
False (Reason: The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense.)
Match the bond features with the party/parties for whom they are most beneficial. Callable <-> Convertible <->
Primarily beneficial for lender (bond issuer) Beneficial for both, the borrower (bond issuer) and lender (bond investor)
Loans requiring periodic payments of interest and principle are referred to as _______________ notes.
installment
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
When bonds are issued at a premium, the carrying value of the debt ______________ over time.
decreases
On January 2, 2018, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $191,684 with an effective interest rate of 7%. Interest expense on June 30, 2018, using the effective interest method, will be equal to (round to whole dollars)
$6,709. (Reason: 191,684 x 0.035 (7% semiannually))
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
A bond-related schedule that summarizes cash paid, interest expense, and changes in bond carrying value is referred to as a bond ________________ schedule.
amortization
Convertible bonds allow the lender to convert each bond into:
common stock
Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:
credit to Premium on Bonds Payable credit to Bonds Payable debit to Cash
Munchen Company sold bonds at a premium. Over the life of the bonds, the carrying value of the bonds will
decrease.
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
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.