MGMT 20000 Chapter 9 Review

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. A. True B. False

B. False

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

Term

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

financial

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

B. False

Corporate bonds most often pay interest _____.

semiannually

The _____ rate of interest is used to compute the cash interest paid to bondholders. (Enter one word per blank)

stated

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: A. $4,500 B. $195,500 C. $204,500 D. $200,000

B. $195,500

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

Bonds will be issued a premium if the stated interest rate is A. equal to the market interest rate. B. less than the market interest rate. C. fluctuating on the day of issuance. D. greater than the market interest rate.

D. greater than the market interest rate.

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as A. convertible bonds B. term bonds C. serial bonds

B. term bonds

Callable bonds can be redeemed at the choice of A. both the bond issuer and bondholder. B. the bond issuer. C. the bondholder.

B. the bond issuer.

The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by _____ _____. (Enter one word per blank)

interest expense

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 _____. A. Notes Payable; Cash B. Bonds Payable; Cash C. Cash; Bonds Payable D. Cash; Bonds Receivable

C. Cash; Bonds Payable

In a private placement of bonds, bonds may be sold to A. a single large investor. B. an underwriter who sells it to individual investors. C. the general public.

A. a single large investor.

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? A. The issue price will equal the bond's face value. B. The issue price will be below the bond's face value. C. The issue price will be above the bond's face value.

C. The issue price will be above the bond's face value.

The Discount on Bonds Payable account is classified as a(n) A. expense. B. asset. C. loss. D. contra-liability.

D. contra-liability.

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 A. a discount. B. a premium. C. face amount.

C. face amount.

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

annuity

Financing with _____ requires borrowing, whereas financing with _____ requires issuing shares of stock. (Enter one word per blank.)

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

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. a premium. B. face amount. C. a discount.

C. a discount.

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

Convertible

The higher the debt to equity ratio is for a company, the _____ the risk of bankruptcy is for that company. A. higher B. lower

A. higher

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include: A. A debit to loss on bond issuance B. A credit to bonds payable for $100,000 C. A credit to discount on bonds payable for $2,000 D. A debit to discount on bonds payable for $2,000

B. A credit to bonds payable for $100,000 D. A debit to discount on bonds payable for $2,000

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. (Enter one word per blank)

lease

When a corporation repurchases its bonds from the bondholders, the corporation _____ the bonds.

retires

The rate of interest printed on the face of a bond is referred to as the _____ interest rate. (Enter one word per blank)

stated

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

term; serial

The two types of financing are A. operating financing. B. debt financing. C. investing financing. D. equity financing.

B. debt financing. D. equity financing.

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 A. $200,000. B. $260,000. C. $212,000.

A. $200,000.

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: A. Cash for $98,000 B. Cash for $100,000 C. A debit to loss on bond issuance for $2,000 D. Discount on bonds payable for $2,000

A. Cash for $98,000 D. Discount on bonds payable for $2,000

Identify two ratios commonly used to assess a company's financial risk. A. Times interest earned ratio B. Current ratio C. Gross profit ratio D. Debt to equity ratio E. Equity yield ratio

A. Times interest earned ratio D. Debt to equity ratio

Periodic payments on installment notes typically include (Select all that apply.) A. a portion that reduces the outstanding loan balance. B. installment fees. C. a portion that reflects interest. D. an increase in stockholders' equity

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

Which of the following are common characteristics or provisions of bonds? A. convertible B. perpetual or periodic C. term or serial D. secured or unsecured E. indefinite or redeemable

A. convertible C. term or serial D. secured or unsecured

The carrying value at maturity is equal to the face amount of bonds issued at: A. face amount, discount, and premium B. face amount and discount only C. discount and premium only D. face amount and premium only E. face amount only

A. face amount, discount, and premium

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) A. lease. B. direct purchase plan. C. indenture. D. contingent contract.

A. lease.

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's: A. long-term debt B. net income C. current liabilities D. total assets

A. long-term debt

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. A. present value; market B. present value; stated C. future value; market D. future value; stated

A. present value; market

Bonds that are backed by collateral are _____. A. secured B. debentures C. callable D. convertible

A. secured

Most corporate bonds pay interest A. semiannually. B. monthly. C. annually D. quarterly

A. semiannually.

Which of the following are common characteristics or provisions of bonds? A. free or redeemable B. convertible C. secured or unsecured D. callable E. perpetual or periodic

B. convertible C. secured or unsecured D. callable

Identify the characteristics of an annuity. A. A series of amounts that vary from period to period B. A series of amounts that are equal C. Equal time periods between payment dates D. Varying time periods between payment dates

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

Which of the following statements is correct? A. Bonds for which the effective interest rate rises must be retired early. B. Bonds may be retired at maturity or retired early. C. Bonds can be retired only at maturity.

B. Bonds may be retired at maturity or retired early.

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

B. False

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: A. Carrying value of $101,200 B. Less discount on bonds payable of $1,200 C. Bonds payable of $100,000

B. Less discount on bonds payable of $1,200 C. Bonds payable of $100,000

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: A. Carrying value of $101,200 B. Less discount on bonds payable of $1,200 C. Bonds payable of $100,000

B. Less discount on bonds payable of $1,200 C. Bonds payable of $100,000

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. a credit to Cash of $6,000 B. a debit to Interest expense of $500 C. a credit to Interest payable of $500 D. a debit to Interest expense of $6,000 E. a credit to Cash of $500

B. a debit to Interest expense of $500 C. a credit to Interest payable of $500

Merkel Corporation issues $200,000 face amount bonds with a stated interest rate of 6%. If the market interest rate is 5%, the bonds will issue at A. face amount. B. a premium. C. a discount.

B. a premium.

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? A. Debit interest expense $6,000 B. Credit cash $6,000 C. Credit cash $5,000 D. Credit discount on bonds payable $705 E. Debit interest expense $5,705

C. Credit cash $5,000 D. Credit discount on bonds payable $705 E. Debit interest expense $5,705

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: A. Flagler B. Adams C. Roberts

C. Roberts

Which of the following are correct regarding bonds? A. They obligate the issuing company to pay an estimated amount. B. They obligate the issuing company to repay the bonds when market interest rates decrease. C. They obligate the issuing company to pay a specific amount. D. They obligate the issuing company to repay the bonds when interest rates increase. E. They obligate the issuing company to repay the bonds at a specific date.

C. They obligate the issuing company to pay a specific amount. E. They obligate the issuing company to repay the bonds at a specific date.

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. a credit to Interest expense of $6,000 B. a debit to Interest payable of $6,000 C. a credit to Cash of $6,000 D. a debit to Interest expense of $6,000

C. a credit to Cash of $6,000 D. a debit to Interest expense of $6,000

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) A. common stock. B. maturable asset. C. bond. D. obligation payment.

C. bond.

Convertible bonds allow the lender to convert each bond into: A. secured bonds B. preferred stock C. common stock

C. common stock

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 A. debit to Bonds payable of $100,000 and a credit to Cash of $100,000. B. debit to Cash of $100,000 and a credit to Bonds payable of $99,000 and to Premium on bonds payable of $1,000. C. debit to Cash of $100,000 and a credit to Bonds payable of $100,000.

C. debit to Cash of $100,000 and a credit to Bonds payable of $100,000.

Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing: A. current assets B. net income C. long-term liabilities D. current liabilities

C. long-term liabilities

A common reason for redeeming a bond prior to its maturity date is that A. market interest rates increased. B. the market price of bonds decreased. C. market interest rates decreased.

C. market interest rates decreased.

Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are: A. unsecured B. convertible C. secured

C. secured

The debt to equity ratio is calculated as A. current liabilities divided by total stockholders' equity. B. noncurrent liabilities divided by current liabilities + stockholders' equity. C. total liabilities divided by total stockholders' equity. D. long-term debt divided by total stockholders' equity.

C. total liabilities divided by total stockholders' equity.

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. A. $100,000 B. $95,056 C. $93,643 D. $88,699

D. $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. A. $100,196 B. $92,418 C. $100,000 D. $92,278

D. $92,278

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? A. Credit cash $6,000 B. Debit interest expense $12,000 C. Debit interest expense $10,000 D. Credit cash $5,000

D. Credit cash $5,000

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as: A. business risk B. investment risk C. bonds payable risk D. default risk

D. default risk

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

Secured

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

contra-liability

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

installment

The _____ rate of interest is an implied rate based on the price investors pay to purchase a bond. (Enter one word per blank)

market

Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) _____ placement.

private