ACC SB 9
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
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
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 ______. Multiple choice question.
Cash; Bonds Payable
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
A corporation that wishes to borrow from the general public rather than a bank will issue
bonds (A note payable is not used to borrow from the general public.)
Convertible bonds allow the lender to convert each bond into:
common stock
___ bonds are retired when the bondholder exchanges them for the issuing company's stock.
convertible
Financing with ___ requires borrowing, whereas financing with ___ requires issuing shares of stock.
debt/liabilities equity
Market rates of bonds vary depending on the ___ risk of the company issuing the bonds.
default
In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:
equity
___ financing refers to obtaining investment from stockholders.
equity/shareholder/stockholder
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of ___ risk.
financial
Bonds will be issued a premium if the stated interest rate is
greater than the market interest rate.
Which of the following provides the clearest indication of an organization's ability to pay current and future interest.
high earnings relative to interest expense
The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.
higher
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
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
___ bonds require payment of the full principle amount of the bond at the end of the loan term.
Term
The return on assets measures the amount ___ of generated for each dollar of assets.
income/profit/earnings
Loans requiring periodic payments of interest and principle are referred to as
installment
The times interest earned formula is calculated as net income plus interest expense plus tax expense divided by ___ ___.
interest expense
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 true interest rate used by investors to value a bond issue is referred to as the:
market interest rate
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
A(n) ___ bond is backed by a lien on specified real estate owned by the issuer.
secured
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
Corporate bonds most often pay interest
semiannually
Bonds that systematically mature over a series of years are called ___ bonds.
serial
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
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
Katie Company has outstanding bonds due in four years. Katie Company regularly deposits money in an investment account; these accumulated funds will be used to pay off the bonds in four years. Katie apparently has a
sinking fund
Callable bonds can be redeemed at the choice of
the bond issuer
The ratio that provides an indication to creditors of how much greater net income is than interest expense is called the
times interest earned ratio
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
Most bonds issued today are ___.
unsecured
True or false: The market interest rate for corporate bonds is the same for each company and is set by the Federal Reserve Board.
False (Market interest rates for bonds vary among companies based on their default risk.)
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False (The debt to equity ratio is total liabilities divided by total stockholders' equity.)
True or false: The times interest earned formula is net income divided by interest expense.
False (The times interest earned formula is calculated as earnings before interest and taxes divided by interest expense.)
The ___ ate 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/coupon/nominal market/effective
Bonds that mature on one specific date are called ___ bonds, whereas bonds that mature in installments are referred to as ___ bonds.
term serial
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
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)
unsecured/debenture
Periodic payments on installment notes typically include:
1. a portion that reduces the outstanding loan balance 2. a portion that reflect interest
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 credit to Premium on Bonds Payable of $10,000 A debit to Cash of $110,000. A credit to Bonds payable of $100,000
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
Cabot Inc. has 6%, $100,000 face amount bonds outstanding. The bonds were issued at a premium. At end of the current fiscal period, the balance of premium on bonds payable is $1,200.The balance sheet presentation of Cabot's bonds should include:
Bonds payable of $100,000 Plus premium on bonds payable of $1,200
The journal entry to recognize the signing of an installment notes payable includes:
Debit Cash Credit Notes Payable
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:
Discount on bonds payable for $2,000 Cash for $98,000
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 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
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
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
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
Walker Inc. signs a $24,000 installment note, which requires equal monthly payments of $1,100 over the next two years. The journal entry to recognize the note includes a: Multiple choice question.
credit to Notes Payable for $24,000
The higher a company's earnings relative to its interest expense, the more likely it is that it will be able to pay its
current and future interest payments.
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 refers to borrowing money from creditors.
debit/liability
___ financing refers to borrowing money from creditors.
debt
A bond will be issued at a premium when the market rate of interest is ______ the stated rate.
less than
In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:
debt
Which of the following financial ratios provides information about the income generated per dollar of assets?
return on assets
___ bonds are supported by a specific asset the issuer pledges as collateral.
secured
Which of the following are the most common types of bonds?
unsecured
The rate of interest printed on the face of a bond is referred to as the
stated
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.
stated/coupon/nominal
The two types of financing are
debt financing equity financing
Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:
discount
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.
Common characteristics or provisions of bonds?
secured or unsecured convertible callable term or serial
The ___ rate of interest is used to compute the cash interest paid to bondholders.
stated/nominal/coupon
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 stated rate is not always equal to the market rate of interest.)
Which of 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 credit to Interest payable of $500 a debit to Interest expense of $500
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
