ACC 221 Chapter 14A Smartbook LO 1-3
On January 1, 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 $212,000. $200,000. $260,000.
$200,000.
On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on January 1 and July 1. On December 31, 20X1, the company should credit interest expense for $7,000. bond discount for $800. interest expense for $7,800.
bond discount for $800. Reason: (195,000 x 0.04) - ($200,000 x 0.035)
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as _____ coupon bonds.
zero
Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as unsecured liquidating subordinate secondary
subordinate
When we multiply the face amount of bonds with the stated interest rate, we calculate interest expense or revenue the amount of interest paid
the amount of interest paid
A common reason for redeeming a bond prior to its maturity date is that market interest rates decreased. the market price of bonds decreased.
market interest rates decreased.
The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to improve net income. reduce reporting costs. be easier to apply. mislead investors.
mislead investors.
Which of the following are cash flows typically associated with already issued bonds? (Select all that apply.) amortization of gains and losses the face amount at maturity periodic interest payments
the face amount at maturity periodic interest payments
The specific promises made to bondholders are described in a document referred to as a bond warrant. indenture. debenture. option contract.
indenture.
Match the description with the correct term. Discount
A bond that sells for more than its face amount
Match the description with the correct term. Premium
A bond that sells for more than its face amount
Which of the following is correct regarding the effective interest method? Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. Interest paid is equal to the effective interest rate multiplied by the maturity value. Interest recorded is equal to the effective interest rate multiplied by the issue price.
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? A bank must guarantee a new bond issue. It is impractical for the issuer to enter into an agreement with each bondholder. Bond issuers are not permitted to enter into separate agreements with bondholders.
It is impractical for the issuer to enter into an agreement with each bondholder.
Which of the following is true regarding a debenture bond? It is secured by the faith and credit of the issuer. It is secured by an outside third party. It is secured by the issuer's long-term assets.
It is secured by the faith and credit of the issuer.
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic. Periodic interest is incurred Periodic interest must be paid Periodic principal payments must be made
Periodic interest is incurred
Zero-coupon bonds typically issue at a deep discount because they offer a low interest rate are high risk bonds offer a high interest rate pay no interest
pay no interest
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. The company should also credit gain on bonds payable for $709. debit loss on bonds payable for $709. credit discount on bonds payable for $1,418. debit discount on bonds payable for $1,418. credit gain on bonds payable for $1,418. credit discount on bonds payable for $709. debit discount on bonds payable for $709. debit loss on bonds payable for $1,418.
credit discount on bonds payable for $709.
As a result of applying the effective interest method, the carrying value of bonds is equal to the present value of the _____ cash flows.
future, expected, or remaining
A bond investor who applies the effective interest method calculates interest revenue based on the _____ balance of the bonds times the _____ interest rate. outstanding; effective outstanding; stated effective; stated maturity; effective
outstanding; effective
Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the maturity value plus accrued interest payable. present value of the future cash flows using current rates. present value of the future cash flows using original rates.
present value of the future cash flows using original rates.
Generally, liabilities are valued at their present value. nominal amount. fair market value. net realizable value.
present value.
On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars). $100,000 $115,589 $81,307 $107,000
$115,589 Reason: (100,000 x 0.61027) + (3,500 x 15.58916) .061027 = n 20, i 2.5 (PV) 15.58916 = n 20, i 2.5 (PVA)
On January 1, 20X1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds payable of $212,000. $200,000. $260,000.
$200,000.
On January 2, 20X1, 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 market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). $217,966 $215,567 $183,777 $200,000
$217,966 Reason: (200,000 x 0.82035) + (6,000 x 8.98259) 0.82035 = n 10, i 2 (PV) 8.98259 = n 10, i 2 (PVA)
On January 2, 20X1, 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, 20X1, will be equal to (round to the nearest full dollar) $2,875. $3,354. $3,000. $6,709
$3,354. Reason: 95,842 x 0.035
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of $125. $0. $709 $354.
$354. Reason: (95,842 x 0.035) - 3,000
During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was: $400 $9,000 $0 $9,400
$400
On January 2, 20X1, 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%. Effective interest recognized on June 30, 20X1, will be equal to (round to whole dollars) $6,709. $5,751. $6,000. $13,418
$6,709. Reason: 191,684 x 0.035 (7% semiannually)
Which of the following correctly describes a bond indenture? The relationship between the effective interest and the stated interest rates. The portfolio of bonds that are issued during a particular fiscal period. A document detailing the promises made by the bond issuer.
A document detailing the promises made by the bond issuer.
Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct? Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000. Debit cash for $749,000; debit loss on bonds payable for $51,000; credit bonds payable for $800,000. Debit cash for $800,000; credit bonds payable for $800,000.
Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.
Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct? Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000. Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000. Debit investment in bonds for $80,000; credit cash for $80,000.
Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.
Select all that apply Which of the following represent the typical characteristics of liabilities? (Select all that apply.) Interest accrues as time passes on long-term liabilities. Future cash payments are certain or estimable. The requirement of future cash payments. Future cash payments cannot be measured.
Interest accrues as time passes on long-term liabilities. Future cash payments are certain or estimable. The requirement of future cash payments.
Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue? Peter should not recognize any interest until April 1, 20X2. Peter should recognize 3 months of interest. Peter should recognize 6 months of interest.
Peter should recognize 3 months of interest.
On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for? Reduce the cash proceeds and increase the discount and debt issue costs account Increase the cash proceeds and increase the discount and debt issue costs account Reduce the cash proceeds and increase the bonds payable account
Reduce the cash proceeds and increase the discount and debt issue costs account
Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium? The company's reputation must have been recently enhanced by positive publicity. The company's stated interest rate must be higher than that of other competing companies. The company must have issued its bonds earlier than other companies competing in the same market.
The company's stated interest rate must be higher than that of other competing companies.
Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums? The method is not permitted under current U.S. GAAP. The method can be used if a company irrevocably elects the method on the bond issue date. The method can only be used if it produces results that are not materially different from those produced by the effective interest method.
The method can only be used if it produces results that are not materially different from those produced by the effective interest method.
Which of the following is correct regarding the default of a bond issuer? A class action suit must be filed by the trustees as well as the individual bondholders. The trustee holding the indenture can sue the issuer on behalf of the bondholders. Each bondholder must sue the issuing company for payment.
The trustee holding the indenture can sue the issuer on behalf of the bondholders.
Which of the following are correct regarding bonds? (Select all that apply.) They obligate the issuing company to repay the bonds when interest rates increase. They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to repay the bonds when market interest rates decrease. They obligate the issuing company to pay a specific amount. They obligate the issuing company to pay an estimated amount.
They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? They are paid at the same time that other specific debt is satisfied. They receive payment after secured debt has been satisfied. They receive payment only after other specific debt has been satisfied.
They receive payment only after other specific debt has been satisfied.
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at: a premium face amount a discount
a discount
When an accounting period ends between interest dates, interest should be accrued since the last interest date ignored until the next interest payment date prepaid
accrued since the last interest date
The difference between the effective interest and the interest paid represents the time value of money. amortization of a discount or premium. a gain or loss due to changes in market interest rates.
amortization of a discount or premium.
Callable bonds can be redeemed at the choice of the bond issuer. both the bondholder and the bond issuer. bondholder.
bond issuer.
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n) debenture bond serial bond indenture bond secured bond
debenture bond
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the ____ ____ method.
effective interest
On January 1, 20X1, Water 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 and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will decrease by $354. decrease by $709. increase by $709. not change. increase by $354.
increase by $354. Reason: Difference between cash interest paid $3,000 and effective interest of $3,354 = $354 reduces the discount and increases the carrying value of the bond.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will not change. decrease by $709. decrease by $1,418 increase by $1,418 increase by $709.
increase by $709. Reason: The difference between the cash interest paid of $6,000 and the effective interest of $6709 decreases the bond discount, which increases the carrying value of the bond.
Select all that apply Bond issue costs increase the effective interest rate of borrowing. increase the cash proceeds from the issuance of debt. decrease the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt. do not affect the cash proceeds from the issuance of debt.
increase the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds. indenture debenture mortgage real estate
mortgage
A(n) ____ bond is backed by a lien on specified real estate owned by the issuer. (Enter only one word.)
mortgage or secured
A bond that sells for more than its face amount is sold at a ____.
premium
The issue price of a bond is always equal to the sum of future cash flows. par or face amount of the bond. present value of the future cash flows.
present value of the future cash flows.
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to reacquire the bonds when interest rates fall. repay a certain amount at a date to be determined in the future. reacquire the bonds when interest rates rise. pay interest if the company is profitable. repay a certain amount at a specific date.
repay a certain amount at a specific date.
