ACCT | Chapter 9
A potential advantage of debt financing over equity financing is that it fixes the amount of compensation to the lender.
True
The market value of a bond is determined by calculating its present value, which is based on the face amount, the number of periods, and the market rate of interest.
True
____________________ is the amortization method of transferring the same amount from the bond discount or premium each time period to adjust interest expense.
Straight-line
Convertible Bond
allows the bondholder to convert to another security - typically stock
Premium
bonds selling price above face
Discount
bonds selling price below face
Sold by underwriters
some on stock exchange
4. A company issued $10,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds sold was a. 10,000. b. 100,000. c. 1,000,000. d. 10,000,000.
A
6. Bonds sell at a premium when the a. issuing company has a better reputation than other companies in the same business. b. market rate of interest is less than the stated interest rate at the time of issue. c. yield rate of interest is more than the stated rate at the time of issue. d. issuing company agrees to repay the maturity before the due date.
B
Unsecured Bond
Debenture Bond - no collateral pledged, referred to as junk bonds
If a bondholder has the right to retire the bonds, they are referred to as callable.
Fuls
The amortization of a bond premium increases the effective interest expense incurred each period for the issuer.
Fuls
Mortgage bonds are secure bonds.
True
Under the effective interest method of amortization, the interest expense for each period is the carrying value times the ____________________.
effective rate
____________________ bonds may be retired by the issuing company before their specified due date.
Callable
Par
bonds selling price equal to face
Although operating leases are not recorded on the balance sheet by the lessee, they are disclosed in the ____________________.
notes to the financial statements financial statements
1. Long-term debt generally includes a. obligations that will be satisfied within one year. b. accounts payable, because they are interest-bearing. c. obligations that extend beyond one year. d. accrued expenses.
C
A bond's ____________________ is computed by taking the bond's face value, then either subtracting any unamortized discount or adding any unamortized premium.
Carrying value
The contract rate is also called the coupon or stated rate.
True
A lease is accounted for as an operating lease if the present value of the lease payments is at least 90 percent of the fair value of the leased property
Fuls
Bonds are issued at a ____________________ when the issue price exceeds the face value.
Premium
A bond issue price is the present value of the cash flows that the bond will produce.
True
Bonds are generally issued in denominations of $1,000
True
Callable bonds may be retired by the issuer before their specified due date.
True
Convertible bonds normally allow bondholders to convert the bond into another security.
True
In an operating lease, the lessor retains the risks and obligations of ownership.
True
In periods of inflation, debt financing is preferable to equity financing because the company is able to repay the lender in dollars that have declined in purchasing power.
True
Long-term debt generally refers to obligations that extend beyond one year
True
11. Bonds are a popular source of financing because a. the relative cost of issuing debt is often lower than the cost of issuing equity. b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock. c. a company having cash flow problems can postpone payment of interest to bondholders. d. the bondholders can always convert their bonds into stock if they choose.
A
2. Which of the following would describe a callable bond? a. Borrower has the right to pay off the bonds prior to due date. b. Borrower has the right to issue more bonds prior to due date of existing bonds. c. Borrower has the right to call off the interest payments on the bonds. d. Investor has the right to call off the interest payments on the bonds.
A
When each payment reduces the outstanding loan balance, which, in turn, reduces the interest expense in the subsequent period, it is call an ____________________ debt.
installment
7. Kiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds? a. Exactly $500,000 because the company would still pay interest at the stated rate. b. Less than $500,000 because the 7% yield rate of interest was higher than the stated rate. c. More than $500,000 because the 6% stated rate of interest was less than the yield rate. d. The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%.
B
10. When will bonds sell at a discount? a. The credit standing of the issuing company is not as good as other companies in a similar line of business. b. The stated rate of interest is less than the yield rate of interest at the time of issue. c. The stated rate of interest is more than the yield rate of interest at the time of issue. d. The issuing company will be able to retire the bonds at less than face at maturity.
B
13. Which of the following terms does not describe the interest rate printed on the bond certificate? a. coupon rate b. yield rate c. contract rate d. stated rate
B
14. When bonds are issued by a company, the accounting entry shows an a. increase in liabilities and a decrease in stockholders' equity. b. increase in liabilities and an increase in stockholders' equity. c. increase in assets and an increase in liabilities. d. increase in assets and an increase in stockholders' equity.
C
15. When bonds are sold for less than the par amount, this means that the a. maturity value will be less than the par amount. b. maturity value will be greater than the par amount. c. bonds are sold at a premium. d. stated rate of interest is less than the yield rate of interest.
D
16. The Discount on Bonds Payable account is shown on the balance sheet as a. an asset. b. an expense. c. a long-term liability. d. a contra-liability account that reduces the bond to market value at the issue date.
D
A significant disadvantage of financing with debt rather than stock is the fact that the interest expense on debt is not tax-deductible.
Fuls
When a bond is issued at a discount, the amortization of the bond interest increases each year using the straight line method.
Fuls
The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period.
True
The interest rate used to calculate interest expense in the effective interest method of amortization is equal to the market rate of interest at the time the bonds are issued.
True
The relative cost of issuing debt (interest payments) is often lower than the cost of issuing equity.
True
When evaluating a company's solvency, an investor's major concern is whether all debt has been properly recorded.
True
When the yield rate of interest is greater than the stated rate, then the bond will be issued at a discount.
True
A(n) ____________________ lease is recorded on the lessee's balance sheet as an asset and related liability.
capital
Discount on Bonds Payable is shown on the balance sheet as a ____________________.
contra liability valuation account
An advantage of financing with debt rather than stock is that interest expense is ____________________ for tax purposes.
deductible
For a capital lease, the lessee must record both an asset and a liability. The amount of the asset is subsequently reduced by the process of ____________________.
depreciation
A bond
is a type of note that requires the issuing entity to pay the face value of the bond to the holder when it matures and usually to pay interest periodically at a specified rate
The bond's ____________________ price is typically quoted as a percentage of the face value of the bond.
market
The ____________________ rate of interest is a function of economic factors and the creditworthiness of the borrower.
market yield
8. If a company's bonds are callable, a. the bondholder has the right to sell an option on the bond. b. the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%. c. the bonds are never allowed to remain outstanding until the maturity date. d. the investor never knows what the redemption price will be until the bonds are actually called.
B
9. Convertible bonds are attractive to bondholders because a. they usually carry a higher rate of interest than non-convertible bonds. b. they carry a convertible interest rate that can be increased when the market rate of interest increases. c. they can be converted into stock at the bondholder's option. d. the issuing company cannot retire the bonds before maturity.
C
The times interest earned ratio divides __________________________ by interest expense.
operating income income from operations
Market rate
rate underwriters or market determines is correct rate due to economy or credit status of borrower.
The two promises made by a bond issuer to the purchaser of the bond are to pay periodic interest and to ___________________.
repay the principal repay the principal amount repay the maturity value repay the maturity amount
12. A company issued 10-year, 9%, $1,000,000 bonds paying interest on an annual basis, at a premium. Which one of the following statements is true? a. The annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year. b. The annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. c. The issue price will be less than $1,000,000. d. The cash paid to bondholders will be based on the market rate of interest.
B
The debt-to-equity ratio is defined as total liabilities divided by total stockholders' equity.
True
The amount of money the borrower agrees to repay at maturity is usually referred to as the ____________________.
face value par value principal
Callable Bond
gives the borrower the right to pay off prior to maturity or due date (similar to refinancing)
The effective interest method amortizes premium or discount in a manner that produces a ____________________ rate of interest from period to period.
constant
If the yield rate of interest is greater then the stated rate, then the bonds are issued at a ____________________.
discount
17. The Premium on Bonds Payable account is shown on the balance sheet as a. a contra asset. b. a reduction of an expense. c. a separate valuation account that increases the bond liability to market value at the issue date d. a subtraction from a long-term liability.
C
Debenture bonds are backed by specific collateral of the issuing company
Fuls
Secured Bond
has collateral pledged against borrower's ability to pay
3. A convertible bond is one where a. the issuer can convert from a fixed interest rate to a floating rate. b. the issuer can convert the bond from long-term to short-term. c. the issuer can retire the bond before its specified maturity date. d. the bondholder can convert the bond into common stock at a future time.
D
5. Which of the following statements regarding bonds payable is true? a. Generally, bonds are issued in denominations of $100. b. When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser. c. A debenture bond is backed by specific assets of the issuing company. d. The interest rate in the bond contract is called the stated rate.
D
