LS Chapter 9: Long-Term Liabilities

Most bonds are issued at a slight _______.

discount

Common terms used for the market interest rate is (are):

effective interest rate yield rate

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

income

On December 31, Leann Corp. pays $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

installment notes for $1,120. interest expense for $4,000.

Debt is considered a lower cost method of financing than equity because

interest on debt is tax deductible.

Willard prepares the journal entries to recognize interest for bonds issued at a premium. Interest expense recorded for the second year will be _______ than interest expense recorded for the first year.

less

For a bond issued at a discount, the stated interest rate will be _______ than its yield or return earned by investors.

lower

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

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

Unsecured

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity

Boswell Corp. has the following information in its financial statements: Earnings before interest and taxes - $20k Common stock - $40k Tax expense - $4k etc. What is the times interest earned ratio?

4.0

Convertible bonds may be beneficial to lenders (bond issuer) because they tend to:

require a lower interest rate than bonds issued without the conversion feature

Bonds that systematically mature over a series of years are called _______ bonds.

serial

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

sinking

Cabot inc. has 6% face amount bonds outstanding. The bonds were issued at a premium. At end of the current fiscal period, unamortized bond premium is $1,200. The balance sheet presentation of Cabot's bonds should include:

Bonds payable of $100,000 Plus premium on bonds payable of $1,200

Match the reporting of the value of a bond conversion feature with the corresponding accounting standards. U.S. GAAP, IFRS

U.S. GAAP - Reported as liability IFRS - Reported as equity

If ABC Company receives $100,000 in 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 early retirement of a bond includes _______.

payment of cash recording of a gain or loss elimination of the liability

A bond that sells for more than its face amount is sold at a(n)

premium

Dorothea inc. is selling all of its bonds to a large pension fund. this an example of a(n) _______ placement

private

Wichtel Company issues $100,000 face amount, 10% semiannual bonds that are due in 7 years. The market interest rate is 8%. To calculate the issue price of the bonds, Wichtel should use an interest rate of _______% and _______# of interest periods

4; 14

_______ leases occur when a lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

Capital

Identify the characteristics of an annuity.

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

Identify the characteristics of an annulty.

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

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

False

In 2008, ABC Company issued $100,000 of 20-year bonds at face value. Ten years later, in 2018, the company retired the bonds early by purchasing them in the open market at $101,000. The entry to record this transaction includes a _______.

credit to Cash of $101,000 debit to loss on Bonds Retirement of $1,000 debit to Bonds Payable of $100,000

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 _______ bond.

debenture

Munchen Company sold bonds at a premium. Over the life of the bonds, the carrying value of the bonds will

decrease.

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

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 will be equal to (round to the nearest full dollar)

$3,354.

Margot purchases $10,000 face amount corporate bonds at 98.7. The bonds pay 5% interest semiannually and mature in 10 years. How much did Margot pay for her investment?

$9,870

If a bond issues at "101," it means that it sells at

101% of its face amount

Match each type of bond with its description. Debentures, Callable bonds, Convertible bonds, Term, Serial bonds

Debentures - Unsecured bonds Callable bonds - The issuing company can pay off the bonds at any time Convertible bonds - Bonds that can be exchanged for shares of stock in the issuing company Term - Bond issue that matures on a single date Serial bonds - Bonds that mature in installments

Match the bonds with the effect on the bond-related interest expense. Discounted bonds, Premium bonds

Discounted bonds - Interest expense increases each interest period Premium bonds - Interest expense decreases each interest period

Match each Bond Issue with the changes over time to the bonds' carrying value Issued at Face Amount, Issued at a Premium, Issued at a Discount

Issued at face amount - Carrying value does not change and is equal to issue price Issued at a premium - Carrying value decreases over time and is equal to face amount at maturity Issued at a discount Carrying Value increases over time and is equal to face amount at maturity

Which of the following are possible benefits of leasing an asset rather than purchasing an asset?

Lower periodic payments on the asset improvement in cash flows tax savings

What is the formula to compute the return on assets?

Net income divided by average total assets.

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880.

If a company chooses a(n) _______ lease, its assets and liabilities will be higher than if it had chosen a(n) _______ lease.

capital, operating

The current balance of bonds payable is also referred to as the bonds' _______ value

carrying

Current U.S GAAP permits the option to report some or all of a company's financial assets and liabilities at _______ value rather than at cost or amortized cost.

fair

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

financial