Ch14 Acct
On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars).
$115,589 correct Reason: (100,000 x 0.61027) + (3,500 x 15.58916)
On April 1, Magenta Company sells $500,000 face amount, 10% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is 9%. When the bonds are issued, how much interest will be included in the issue price? Multiple choice question.
$12,500 correct Reason: The price includes accrued interest of 500,000 x 10% x 3/12
On January 1, 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 market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$191,684 Reason: (200,000 x 0.70892) + (6,000 x 8.31661)
Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should recognize this conversion by crediting common stock for Multiple choice question. $
$2,575,000 correct Reason: (10,000 x 1,000 + 300,000) x 25%
On January 1, 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 1, 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 market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). Multiple choice question.
$217,966 Reason: (200,000 x 0.82035) + (6,000 x 8.98259)
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are sold, Early will receive cash in amount of
$520,000. correct Reason: These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. (500,000 x 12% x 4/12) + 500,000
On April 1, Munchin Company sells $800,000 face amount, 6% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 6%. When the bonds are sold, Munchin should receive:
$812,000 Reason: These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. $800,000 + ($800,000 x 0.06 x 3/12)
On January 1, Schneider Company issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 8%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$95,944 Reason: (100,000 x 0.67556) + (3,500 x 8.11090)
Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.)
-Appointed by bond issuer -Holds the bond indenture -Represents the rights of the bond holders
Which of the following represent the typical characteristics of liabilities? (Select all that apply.)
-The requirement of future cash payments. -Interest accrues as time passes on long-term liabilities. -Future cash payments are certain or estimable.
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 among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.)
-To use a medium of exchange in mergers and acquisitions. -To sell the bonds at a higher price. -To enable smaller or debt-heavy companies to gain access to the bond market.
Periodic payments on installment notes typically include
-a portion that reduces the outstanding loan balance. -a portion that reflects interest at the effective interest rate.
On January 1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should record what journal entry? (Select all that apply.)
-credit cash $200,000 -debit investment in bonds $200,000
Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.)
-face amount -stated rate
Debt issue costs
-increase the effective interest rate of borrowing. -reduce the cash proceeds from the issuance of debt.
Installment notes typically involve the purchase of assets and (Select all that apply.)
-periodic payments include principal and interest. -require installment payments over time.
Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit (Select all that apply.)
-premium on bonds payable for $75,000. -bonds payable for $2,500,000.
The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is
1.32. correct Reason: ($100 + $150)/($120 + $50 + $20)
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is
12.5%. Reason: $50/$400 = 12.5%
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is Multiple choice question.
12.5%. Reason: $50/$400 = 12.5%
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on shareholders' equity expressed as a percentage is
27.78%. Reason: 50/(400 - 220)
Which of the following correctly describes a bond indenture?
A document detailing the promises made by the bond issuer.
Neumann Corp. compares three different investment opportunities. Opportunity A has $1 million in debt and $2 million in equity; Opportunity B, $1.5 million in debt and $2 million in equity; Opportunity C, $1 million in debt and $2.5 million in equity. If the companies are equal in all other aspects, which of the companies tends to have the lowest investment risk?
Company C
This ratio may provide information about a company's default risk.
Debt to equity
True or false: Holding gains resulting from decreases in the fair value of debt indicate that the company's debt has become less risky.
False Reason: Holding gains arise from decreases in the fair value of debt, which may be due to an increase in the riskiness of the company's debt.
Hatter Company's new bond issue with face amount of $7 million sells for $6.8 million. Which of the following facts may explain why the bonds sell at a discount?
Hatter Company's stated interest rate must be lower than that of competing companies in the bond market.
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.
Which of the following is correct regarding the return on assets?
It indicates profitability without regard to how resources are financed.
Which of the following is correct regarding the rate of return on shareholders' equity?
It indicates the effectiveness of employing resources provided by owners.
Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture?
It is impractical for the issuer to enter into an agreement with each bondholder.
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit of the issuer.
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
Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue?
Peter should recognize 3 months of interest.
Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue? Multiple choice question.
Peter should recognize 3 months of interest.
Which ratio indicates profitability without regard to how resources are financed?
Rate of return on assets
This ratio provides information about a company's effectiveness of employing resources provided by owners.
Rate of return on shareholders' equity
On January 1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for?
Reduce the cash proceeds and increase the discount and debt issue costs account
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.
Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium?
The company's stated interest rate must be higher than that of other competing companies.
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.
Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?
The method can only be used if it produces results that are not materially different from those produced by the effective interest method.
Which of the following is correct regarding the default of a bond issuer?
The trustee holding the indenture can sue the issuer on behalf of the bondholders.
Which of the following represents an important difference between bonds with detachable warrants and convertible bonds? Multiple choice question.
The warrants can be separated from the bonds.
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy?
They receive payment only after other specific debt has been satisfied.
True or false: The interest rate stated in a note is typically equal to the market rate.
True Reason: The rate is typically negotiated at the time of the loan so the two are equal.
When an accounting period ends between interest dates, interest should be
accrued since the last interest date
The difference between the effective interest and the interest paid represents
amortization of a discount or premium.
Grunwald elected to report its bonds at fair value. During the current year the fair value of the bonds increased due to changes in the related credit risk. Grunwald should report the gain
as part of OCI
Which of the following purchases frequently involve installment notes payable? (Select all that apply.)
automobiles land buildings
Which of the following is a common factor that affects the fair value of a company's bonds?
changes in current market rates
A bond feature that aims at making the bonds more attractive to investors is the ______ feature.
conversion
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as_________ bonds.
convertable
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as bonds.
convertible
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n)
debenture bond
Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the
debt to equity ratio.
Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the Multiple choice question.
debt to equity ratio.
Volk Company selected the fair value option for its outstanding bonds. During the current year, the company recognized a holding gain relating to the bonds in income. The holding gain is a result of the value of the bonds
decreasing
The debt to equity ratio can provide information regarding a company's risk that it will be unable to pay its debt when due. This is called the company's ____________risk.
default
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the ___________ _____________ method. (Enter only one word per blank.)
effective interest
Munster Company's bonds have increased in fair value and Munster records a gain. This indicates that Munster
elected the fair value option
The return on assets is calculated by dividing _________by total assets.
equity
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 : Reason: Difference between cash interest paid $3,000 and effective interest of $3,354 = $354 reduces the discount and increases the carrying value of the bond.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will
increase by $709. Reason: The difference between the cash interest paid of $6,000 and the effective interest of $6709 decreases the bond discount, which increases the carrying value of the bond.
The specific promises made to bondholders are described in a document referred to as a bond
indenture.
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are issued, Early will credit (Select all that apply.)
interest payable for $20,000. bonds payable for $500,000.
Gertrude Company receives $15,200 relating to its installment note receivable; of this amount $9,000 represents interest. In its statement of cash flows, this inflow should be reported as a(n)
investing activity inflow of $6,200. operating activity inflow of $9,000.
The fundamental reason why companies issue convertible bonds is to
make the bonds more attractive to investors.
The interest rate on notes payable typically is equal to the ______ rate. Multiple choice question.
market
Changes in the current ______ often represent a major contributor to changes in the fair value of bonds.
market interest rate
Bonds that do not include a call provision
may be repurchased on the open market
The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to
mislead investors.
A(n)_________ bond is backed by a lien on specified real estate owned by the issuer. (Enter only one word.
mortgage
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as Blank______ bonds.
mortgage
The return on assets is calculated by dividing ___________ ____________by total assets.
net income
The return on shareholders' equity is calculated by dividing ____________by total shareholders' equity.
net income
Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit
notes payable
In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n)
operating activity.
If bonds sell between interest periods, the amount received by the bond issuer includes the bonds selling price
plus accrued interest.
A bond that sells for more than its face amount is sold at a
premium
The issue price of bonds is calculated as the ____________value of all the cash flows required of the bonds.
present
The issue price of a bond is always equal to the
present value of the future cash flows.
Generally, liabilities are valued at their
present value.
A company that recognizes a long-term notes payable has signed the legal document referred to as a ____________note.
promissory
The primary purpose of the call feature associated with bonds is to
protect the issuer against declining interest rates.
If a company elects to report bonds under the fair value option, changes in fair value result in
reported gain or loss
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
Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as
subordinate
If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the: Multiple choice question.
value of the asset or service exchanged
Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the
value of the purchased equipment.
Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the Multiple choice question.
value of the purchased equipment.
