MGMT chpt 9 review

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

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

face amount, discount, and premium

The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.

higher

A common reason for redeeming a bond prior to its maturity date is that

market interest rates decreased

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

private

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

retires

A(n)_________bond is backed by a lien on specified real estate owned by the issuer.

secured

Financing with___________requires borrowing, whereas financing with________requires issuing shares of stock. (Enter one word per blank.)

debt, equity

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

financial

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

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

market(or effective)

Most corporate bonds pay interest

semiannually

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

stated

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

stated

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

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

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

installment

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

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

False

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 common characteristics or provisions of bonds?

-secured or unsecured -term or serial -callable or convertible

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

greater than the market interest rate.

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

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

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

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

-Cash for $98,000 -Discount on bonds payable for $2,000

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 discount on bonds payable $705 -credit cash $5,000

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:

-Less discount on bonds payable of $1,200 -Bonds payable of $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 credit to Cash of $6,000 -a debit to Interest expense of $6,000

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

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

The two types of financing are

-debt -equity

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

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

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 premium

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

annuity

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

Convertible bonds allow the lender to convert each bond into:

common stock

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

contra-liability

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

contra-liability

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

convertible

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

market interest rate

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

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

Callable bonds can be redeemed at the choice of

bond issuer

A corporation that wishes to borrow from the general public rather than a bank will issue

bonds

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

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

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

secured

Bonds that mature on one specific date are called_________bonds, whereas bonds that mature in installments are referred to as__________bonds

term, serial

Which of the following are correct regarding bonds?

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

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

-Times interest earned ratio -Debt to equity ratio

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

False

Corporate bonds most often pay interest____________

semiannually

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

term

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

Which of the following statements is correct?

Bonds may be retired at maturity or retired early.

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

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 debit to Interest expense of $500 -a credit to Interest payable of $500

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

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.

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

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

secured