smartbook 9b

secured bonds

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

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

less than

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

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

T or F: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.

false; Reason: Market interest rates for bonds vary among companies based on their default risk.

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

stated

Bonds that mature on one specific date are called ____ bonds

term

Candy Corporation has $100,000 of 8% bonds that were issued in Year 1 at face amount. When the bonds are repaid at the maturity date, the journal entry will require which of the following entries?

Credit cash $100,000 Debit bonds payable $100,000

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

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

sinking fund

the most common types of bonds

unsecured

Bonds that systematically mature over a series of years are called

serial bonds

Margot Inc. issues $10 million in bonds, of which $2 million are due each year for the next 5 years. Margot Inc.'s bonds are commonly referred to as a

serial bonds

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

Corporate bonds most often pay interest

Semiannually

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)

unsecure bond

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

retires

bonds that mature in installments are referred to as _____ bonds.

serial

The _____ rate of interest on a bond is the interest rate printed on the bond, whereas the ______ rate of interest is the current rate of interest being paid on investments with similar characteristics.

stated; market/effective

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.

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

private placement

Bonds

They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount. may be retired at maturity or retired early.

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at

a premium

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

a single large investor.

convertible bonds

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

secure bonds

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

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

secured

Callable bonds can be redeemed at the choice of

bond issuer

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?

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

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

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

the following is true regarding a debenture bond

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

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

Market rates of bonds vary depending on the _____ risk of the company issuing the bonds.

default

the stated rate of interest

is used to pay periodic interest on the bonds, whereas the market rate of interest is used to calculate interest expense.

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

market interest rates decreased.

common characteristics or provisions of bonds

convertible term or serial secured or unsecured

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

A lease

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 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 following are common characteristics or provisions of bonds

convertible callable secured or unsecured

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

market interest rate