Chapter 9 - Learnsmart
Bonds that mature on one specific dates are called ____________ bonds, whereas bonds that mature in installments are referred to as ___________ bonds.
Term, serial
Callable bonds can be redeemed at the choice of
The bond issuer
Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a discount. At the end of the current fiscal period, unamortized bond discount is $4,500. The total bond-related liability reported on Omar's balance sheet should be:
$195,500
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
Bonds may
Be retired at maturity or retired early
Corporate bonds most often pay interest _____________.
semiannually
Serial bonds
Bonds that mature in installments
Issued at a discount
Carrying value increases over time and is equal to face amount at maturity
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:
Cash for $98,000 and Discount on bonds payable for $2,000
___________ bonds are retired when the bondholder exchanges them for the issuing company's stock.
Convertible
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
An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the ____________ date.
Maturity
Return on assets
Provides information about the income generated per dollar of assets
The rate of interest printed on the face of a bond is referred to as the _____________ interest rate.
Stated
______________ bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
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
Callable bonds
The issuing company can pay off the bonds at any time
Which of the following are the most common types of bonds?
Unsecured
Convertible bonds allow the lender to convert each bond into:
Common stock
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) __________ placement.
Private
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
A(n) __________ bond is backed by a lien on specified real estate owned by the issuer.
Secured
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
Secured
Corporate bonds most often pay interest __________________.
Semiannually
Most corporate bonds pay interest
Semiannually
The __________ rate of interest is used to compute the cash interest paid to bondholders.
Stated
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
Bonds that require payment of the full principle amount of the bonds at the end of the loan term are referred to as
Term bonds
What are common characteristics or provisions of bonds?
Term or serial, secured or unsecured, convertible
Two ratios commonly used to assess a company's financial risk
Times interest earned ratio, and debt to equity ratio
The debt to equity ratio is calculated as
Total liabilities divided by total stockholders' equity
Debenture bonds are
secured by the faith and credit standing of the issuer.
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
Financing with _______ requires borrowing, whereas financing with ________ requires issuing shares of stock.
Debt, Equity
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 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
Characteristics of an annuity
Equal time periods between payment dates, a series of amounts that are equal
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
Bonds will be issued a premium if the stated interest rate is
Greater than the market interest rate
Premium bonds
Interest expense decreases each interest period
Discounted bonds
Interest expense increases each interest period
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.
Lease
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
Loans requiring periodic payments of interest and principle are referred to as ________ notes.
Installment
Loans requiring periodic payments of interest and principle are referred to as ____________ notes.
Installment
The return on assets measures the amount of ________ generated for each dollar of assets.
Profit
____________ bonds are supported by a specific asset the issuer pledges as collateral.
Secured
_______________ bonds require payment of the full principle amount of the bond at the end of the loan term
Term
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
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock
False
True or false: the debt to equity ratio is calculated as total liabilities divided by common stock
False
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ____________ risk.
Financial
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of _____________ risk
Financial
Bonds that are backed by collateral are ____________.
Secured
A series of equal amounts paid or received over equal time periods is called a(n)
Annuity
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
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
The two types of financing are
Debt and equity
In a private placement of bonds, bonds may be sold to
A single large investor
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
Term
Bond issue that matures on a single date
A corporation that wishes to borrow from the general public rather than a bank will issue
Bonds
Secured
Bonds are backed by collateral
Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a discount. At end of the current fiscal period, unamortized bond discount is $1,200.The balance sheet presentation of Cabot's bonds should include:
Bonds payable of $100,000 and less discount on bonds payable of $1,200
A common reason for redeeming a bond prior to its maturity date is that
Market interest rates decreased
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, debit interest expense $5,705 and credit discount on bonds payable $705
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 discount on bonds payable $705, credit cash $5,000 and debit interest expense $5,705
The discount on bonds payable account is classified as a(n)
Contra-liability
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
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?
Debit interest expense $5,705, credit cash $5,000, and credit discount on bonds payable $705
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
Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bond will issue at:
A discount
Periodic payments on installment notes typically include
A portion that reduces the outstanding loan balance and a portion that reflects interest
Characteristics of annuity include:
A series of amounts that are equal, equal time periods between payment dates
Common characteristics or provisions of bonds include:
Callable, secured or unsecured and convertible
Issued at premium
Carrying value decreases over time and is equal to face amount at maturity
Issued at face amount
Carrying value does not change and is equal to issue price
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:
Cash for $98,000 and discount on bonds payable for $2,000
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
The carrying value at maturity is equal to the face amount of bonds issued at:
Face amount, discount, and 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
Werner issues bonds at a discount. The related discount account should be 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 higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company
Higher
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by _____________ ______________
Interest expense
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's
Long-term debt
In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:
Long-term debt
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
The __________ rate of interest is an implied rate based on the price investors pay to purchase a bond.
Market or effective
The ___________ rate of interest is an implied rate based on the price investors pay to purchase a bond.
Market or effective
An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the _________ date
Maturity
When a corporation repurchases its bonds from the bondholders, the corporation _____________ the bonds.
Retired
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 and a debit to interest expense of $500
Convertible bonds
Bonds that can be exchanged for shares of stock in the issuing company
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
Most bonds issued today are _________.
Unsecured
Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:
A debit to discount on bonds payable for $2,000, and a credit to bonds payable for $100,000
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 debit to interest expense of $6,000 and a credit to cash of $6,000
Regardless of whether bonds are issued at face amount, or discount, or a premium, their carrying value is equal to face amount at the ____________ date
Maturity