ACC 210 Exam 3

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

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

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

contra liability

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

contra-liability.

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

convertible

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

financial risk

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

greater than the market interest rate.

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

lower

The __________ rate of interest is an implied rate based on the price investors pay to purchase a bond.

market

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

Most long term liabilities are payable in

more than one year

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

Most corporate bonds pay interest

Semiannually

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

Term

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

The two types of financing are

equity financing and debt financing

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

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

market interest rates decreased

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

stated

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

False

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

False

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

secured

The price of a bond includes

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

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

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:

Roberts

Corporate bonds most often pay interest

Semiannually

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 $500 - A credit to Interest payable of $500

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

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

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?

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

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

- Times interest earned ratio - Debt to equity ratio

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

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

-debit to Interest expense of $6,000 -credit to Cash of $6,000

Coral Company has the following financial statement information: Current assets $30,000; Noncurrent assets $70,000; Current liabilities $20,000; Noncurrent liabilities $40,000; and Stockholders' equity $40,000. What is the debt to equity ratio?

1.50 (20,000 + 40,000) / 40,000

Linton Company has the following financial statement information: Current assets $20,000; Noncurrent assets $80,000; Current liabilities $20,000; Noncurrent liabilities $60,000; and Stockholders' equity $20,000. What is the debt to equity ratio?

4 ($20,000 + $60,000) / $20,000

Which of the following statements is correct? Multiple choice questions. - Bonds can be retired only at maturity. - Bonds may be retired at maturity or retired early. - Bonds for which the effective interest rate rises must be retired early.

Bonds may be retired at maturity or retired early.

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

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 (7.72173 x $8,000 x 0.5) + (0.61391 x $100,000) = $92,278

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 a discount on bonds payable for $2,000

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

Periodic payments on installment notes typically include

a portion that reduces the outstanding loan balance and a portion that reflects the interest

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

a single large investor

commercial paper

a written promise from one company to another to pay a specific amount of money

Convertible bonds allow the lender to convert each bond into:

common stock

Deferred Revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

Notes Payable

A written promise made by the business to pay a debt, usually involving interest, in the future.

True or false: When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.

True

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.

(5.65022 x $10,000) + (0.32197 x $100,000) = $88,699

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.

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.

Financing with ___________ requires borrowing, whereas financing with ____________ requires issuing shares of stock.

debt;equity

Interest =

face value x annual interest rate x fraction of the year

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

face

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

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

Loans requiring periodic payments of interest and principal are referred to as ________ notes

installment

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

interest expense

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

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.

lease

liability

obligation of a company to transfer some economic benefit in the future

Most current liabilities are payable within

one year from the balance date sheet

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

Mann Inc. issues $100,000 bonds at face amount. The bonds pay interest of 6%. Berkely Inc., a company with comparable risk, issues $100,000 bonds, paying 5% interest for $98,000 Which of the following is true?

Both bonds yield a return of 6% to investors.

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

secured