Smart Book_Chapter 9

Issued at a discount

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

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate.

The times interest earned ratio provides an indication of

how many times greater earnings are than interest expense.

The price of a bond includes

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

Callable bonds

The issuing company can pay off the bonds at any time

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.

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

secured or unsecured term or serial convertible

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.

Market rates of bonds vary depending on the______risk of the company issuing the bonds.

default

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

Most bonds issued today are ______.

unsecured

Convertible bonds

Bonds that can be exchanged for shares of stock in the issuing company

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

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

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

Serial bonds

Bonds that mature in installments

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, nominal, coupon

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 debit to Cash of $110,000. A credit to Premium on Bonds Payable of $10,000 A credit to Bonds payable of $100,000

Omar Inc. has 6%, $200,000 face amount bonds outstanding. The bonds were issued at a premium. At the end of the current fiscal period, the balance of premium on bonds payable is $4,500. The liability reported on Omar's balance sheet should be:

$204,500

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

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

less than

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

long-term debt

When bonds are issued at a premium, the carrying value of the debt over time.

decreases, diminishes, reduces, or shrinks

Debt can be an advantage for stockholders if it

earns a return on borrowed funds that exceeds the cost of borrowing.

Identify the characteristics of an annuity.

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

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.

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

-Protection against declining asset value -Lower periodic payments on the asset -Improvement in cash flows

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal? (Select all that apply.)

-The cash paid each payment period -Interest expense based on the beginning period carrying value and the effective rate of the loan -The carrying value of the note at the end of the period -The decrease in the carrying value of the note

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 Credit cash $5,000 Credit discount on bonds payable $705

Munchin Corporation has $200,000 of 6% bonds that were issued in Year 1 at $202,000. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?

Debit bonds payable $200,000 Credit cash $200,000

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 Debit premium on bonds payable $789 Credit cash $4,000

Premium bonds

Interest expense decreases each interest period

Discounted bonds

Interest expense increases each interest period

Which of the following are typically shown in an amortization schedule related to an installment notes payable? (Select all that apply.)

The cash paid each payment period The carrying value of the note at the end of the period The carrying value of the note at the beginning of the period

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 a debit to Loss on bond retirement of $1,000 a debit to Bonds payable of $100,000

On January 2, 2018, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $191,684 with an effective interest rate of 7%. Interest expense on June 30, 2018, using the effective interest method, will be equal to (round to whole dollars)

Reason: 191,684 x 0.035 (7% semiannually)

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, using the effective interest method, will be equal to (round to the nearest full dollar)

Reason: 95,842 x 0.035

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

Stated, nominal, coupon

At the beginning of a lease period, the lessee records

a lease asset and lease payable for the present value of the lease payments.

Term

Bond issue that matures on a single date

Werner Inc. issues bonds at a premium. Werner's journal entry to record the issuance should include:

credit to Bonds Payable debit to Cash credit to Premium on Bonds Payable

Bonds that systematically mature over a series of years are called____bonds

serial

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

Secured

Bonds are backed by collateral

Which of the following statements is correct?

Bonds may be retired at maturity or retired early.

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

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

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)?

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.

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

stated, nominal, coupon, face