Chapter 9 SmartBook

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

The journal entry to recognize the signing of an installment notes payable includes:

Debit Cash Credit Notes Payable

The return on assets measures the amount of ________ generated for each dollar of assets.

income

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

_________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time.

lease

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

_________ rate of interest is an implied rate based on the price investors pay to purchase a bond

market

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

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

maturity

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:

secured

_________ bonds are supported by a specific asset the issuer pledges as collateral.

secured

An investment fund into which an organization makes payments each year over the life of its outstanding debt is referred to as a(n) _______ fund

sinking

Callable bonds can be redeemed at the choice of

the bond issuer.

Which of the following is true regarding a debenture bond?

It is secured by the faith and credit standing of the issuer.

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by

Interest Expense

premium bonds

Interest expense decreases each interest period

Which of the following provides the clearest indication of an organization's ability to pay current and future interest.

high earnings relative to interest expense

Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value is equal to face amount at the __________ date

maturity

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's:

long-term debt

Bonds may issue at:

a premium face amount a discount

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 series of equal amounts paid or received over equal time periods is called a(n) ________

annuity

Werner issues bonds at a discount. The related Discount account should be classified as a(n)

contra-liability

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

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.

On the maturity date, the carrying value of bonds issued at a premium will be equal to the

face amount.

The debt to equity and the times interest earned ratios provide investors and creditors with a measure of _______ risk

financial

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

Loans requiring periodic payments of interest and principle are referred to as __________ notes.

installment

Bonds that mature on one specific date are called _______ bonds, whereas bonds that mature in installments are referred to as ______ bonds

term serial

bonds are supported by a specific asset the issuer pledges as collateral.

unsecured

_________ bonds require payment of the full principle amount of the bond at the end of the loan term.

term

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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 Less discount on bonds payable of $1,200

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 Discount on bonds payable for $2,000

_________ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

Identify two ratios commonly used to assess a company's financial risk.

Times interest earned ratio Debt to equity ratio

Which of the following are the most common types of bonds?

Unsecured

The price of a bond includes

present value of the face amount plus the present value of the periodic interest payments

Most corporate bonds pay interest

semiannually

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

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

True or false: The times interest earned formula is net income divided by interest expense.

False

Which of the following financial ratios provides information about the income generated per dollar of assets?

Return on assets

Corporate bonds most often pay interest ________

Semiannually

In a private placement of bonds, bonds may be sold to

a single large investor.

The Discount on Bonds Payable account is classified as a(n)

contra-liability.

Which of the following are common characteristics or provisions of bonds?

convertible secured or unsecured callable term or serial

Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a:

credit to Notes Payable for $24,000

The higher a company's earnings relative to its interest expense, the more likely it is that it will be able to pay its

current and future interest payments.

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

debenture or unsecured

_______ financing refers to borrowing money from creditors.

debt

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

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate.

discounted bonds

interest expense increases each interest period

A bond will be issued at a premium when the market rate of interest is ______ the stated rate.

less than

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 discount on bonds payable $705 Credit cash $5,000 Reason: $100,000 x 10% x 6/12 Reason: Interest expense ($95,083 x 6%) - Cash interest paid ($100,000 x 5%) = Discount $705

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

Which of the following statements is correct?

Bonds may be retired at maturity or retired early. Bonds may sell below, above, or at their face amount.

Issued at a 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

Issued at a discount

Carrying value increases over time and is equal to face amount at maturity

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

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

The times interest earned ratio provides an indication of

how many times greater earnings are than interest expense.

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

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 A credit to bonds payable for $100,000

Identify the characteristics of an annuity.

A series of amounts that are equal Equal time periods between payment dates

Slater Company issues $1 million face amount bonds for $1.1 million. On the date of maturity, the carrying value of the bonds (assuming that interest has already been accrued) will be equal to

$1 million.

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

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.

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, 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 Credit cash $4,000 Debit premium on bonds payable $789 Reason: Semi-annual interest rate = 6%/2 = 3% x $107,020.

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

Debt

True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.

False

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.

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.

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 credit to Bonds payable of $100,000.

Financing with _________ requires borrowing, whereas financing with _________ requires issuing shares of stock.

debt equity

The two types of financing are

debt financing. equity financing

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.

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

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 7%, the bonds will issue at

a discount.

Periodic payments on installment notes typically include (Select all that apply.)

a portion that reflects interest. a portion that reduces the outstanding loan balance.

The rate of interest printed on the face of a bond is referred to as the _________ interest rate

stated

_________ rate of interest is used to compute the cash interest paid to bondholders.

stated

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

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

When a corporation repurchases its bonds from the bondholders, the corporation ________ the bonds

retired

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

________ bond is backed by a lien on specified real estate owned by the issuer.

secured

Katie Company has outstanding bonds due in four years. Katie Company regularly deposits money in an investment account; these accumulated funds will be used to pay off the bonds in four years. Katie apparently has a

sinking fund.

The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the

times interest earned ratio