accounting ch 9
A high-yield (or HY) bond is
a lesser-quality bond, also known as a noninvestment grade bond, at a higher risk of default
The effective interest rate method does a better job of matching the __________ to the proper period.
time value of money
What are premium and discount accounts called?
valuation accounts
The formula for the times interest earned ratio is
Operating Income/Interest Expense.
A bond is priced as
PV of principal payment + PV of interest payments
If $100,000, 5% bonds are sold at 103, what amount will be credited to Bonds Payable?
$100,000
Mason Company issued $1,000,000 of 8% bonds due in 5 years with interest payable annually on December 31. The yield rate was 7%. The bond currently has a carrying value of $1,018,080. How much will interest expense be?
$71,266
Which account is credited in every bond issuance whether at par, premium, or discount?
Bonds Payable
An important indicator of the purchasing power of money is
CPI
Which account is debited in every bond issuance whether at par, premium, or discount?
Cash
classic installment debt?
Classic installment debt payments are home mortgages or car loans. Installment debt payments are the same each period, but the portion that is considered interest changes because the outstanding principal balance is changing.
Although long-term creditors are concerned with a company's short-term liquidity, they are primarily concerned with its long-term solvency. Which ratios is used to analyze a company's debt load?
Debt to total assets, Long-term debt to equity, Debt to equity
What do bond writers do?
Determine the market rate of interest for the bond, Examine the provisions of the debt instrument, Examine the credit standing of the borrower
Bonds require the payment of interest periodically. When the interest on the bonds is paid, the journal entry to record the payment of this interest is
Interest Expense debit; Cash credit.
advantages of bad debt
Interest expense is tax deductible, Inflation permits the debtor to repay the lender in dollars that have decreased in purchasing power, The amount of compensation to the lender is fixed
What is the significant advantage of financing with debt rather than stock?
Interest expense on debt is deductible for income tax purposes
Companies may choose to __________ instead of purchase an asset.
Lease
When interest-bearing bonds are issued at a discount, how is the interest expense for the period calculated using the effective interest rate method?
The amount of interest payment for the period plus the discount amortization for the period.
The formula for the debt to equity ratio is
Total Liabilities/Total Equity.
Long-term creditors
are primarily concerned with a company's long-term solvency
Monthly interest is highest
at the beginning of the loan period
what do most debt contracts require?
borrower making regular interest payments
Long-term debt that is due to mature over the next year is reported as a
current liability
Usually, lenders set the interest rate to reflect the
desired market rate
The amount paid to the lender in excess of the amount borrowed represents
interest expense
The present value of interest payments is calculated as
interest payment × PV of an annuity
The use of borrowed capital to produce more income than needed to pay the interest on the debt is called
leverage
Bonds may be sold as secured or unsecured. Which bond is always secured?
mortgage bonds
When a company borrows money from a bank, it typically signs a formal agreement with the bank. The company also creates a liability that must be recorded in its accounting records. This liability is called a(n)
note payable
Total interest expense is paid
over the life of the bond
Lenders typically receive
periodic interest payments and repayment of the loan principal.
Bonds are priced at the present value of the
periodic interest payments and the principal.
Lenders decides how much to lend based on
present value of future cash flows.
The present value of principal payments is calculated as
principal payment × PV of a single sum.
If a company finds that it cannot make its payments on debt, it may be forced into __________ or bankruptcy.
restructuring the debt
Many companies structure a lease to avoid
showing a lease liability on the balance sheet
A significant disadvantage of leverage occurs when
the interest on debt exceeds earnings
