Accounting Chapter 9

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

stated, nominal, coupon, or face

Callable bonds can be redeemed at the choice of - the bondholder. - the bond issuer. - both the bond issuer and bondholder.

the bond issuer.

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

Convertible

In a private placement of bonds, bonds may be sold to - the general public. - a single large investor. - an underwriter who sells it to individual investors.

a single large investor

A series of equal amounts paid or received over equal time periods is called a(n) ___________.

annuity

Loans requiring periodic payments of interest and principle are referred to as ___________ notes

installment

In order to assess a company's financial risk, investors and creditors frequently consider and analyze the company's: - net income - long-term debt - current liabilities - total assets

long-term debt

Neumann Corporation is planning to issues bonds with a face amount of $2 million. If Neumann's accountant, Betty, wants to calculate the expected issue she should calculate the ____ of the related future cash payments using the ____ interest rate. - future value; market - future value; stated - present value; stated - present value; market

present value; market

Bonds will be issued a premium if the stated interest rate is - greater than the market interest rate. - less than the market interest rate. - equal to the market interest rate. - fluctuating on the day of issuance.

greater than the market interest rate.

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. - direct purchase plan. - indenture. - contingent contract.

lease

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 - current liabilities - current assets - net income

long-term liabilities

A common reason for redeeming a bond prior to its maturity date is that - the market price of bonds decreased. - market interest rates decreased. - market interest rates increased.

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

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

secured

Corporate bonds most often pay interest ___________.

semiannually

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

stated, nominal, or coupon

Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as - convertible bonds - serial bonds - term bonds

term bonds

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

secured

Which of the following are common characteristics or provisions of bonds? (Select all that apply) - indefinite or redeemable - secured or unsecured - term or serial - convertible - perpetual or periodic

- secured or unsecured - term or serial - convertible

Most corporate bonds pay interest - annually - quarterly - semiannually. - monthly.

semiannually

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

financial

The debt to equity ratio is calculated as - long-term debt divided by total stockholders' equity. - noncurrent liabilities divided by current liabilities + stockholders' equity. - total liabilities divided by total stockholders' equity. - current liabilities divided by total stockholders' equity.

total liabilities divided by total stockholders' equity.

On January 2, 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 - $260,000. - $200,000. - $212,000.

$200,000.

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. - $93,643 - $88,699 - $100,000 - $95,056

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

Periodic payments on installment notes typically include (Select all that apply.) - a portion that reflects interest. - a portion that reduces the outstanding loan balance. - installment fees. - an increase in stockholders' equity

- a portion that reflects interest. - a portion that reduces the outstanding loan balance.

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) - maturable asset. - bond. - common stock. - obligation payment.

bond

A corporation that wishes to borrow from the general public rather than a bank will issue . - preferred stock. - notes payable. - bonds. - common stock.

bonds

Convertible bonds allow the lender to convert each bond into: - secured bonds - common stock - preferred stock

common stock

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. - loss. - expense. - asset.

contra-liability.

Identify the characteristics of an annuity. (Select all that apply). - Varying time periods between payment dates - A series of amounts that are equal - A series of amounts that vary from period to period - Equal time periods between payment dates

- A series of amounts that are equal - Equal time periods between payment dates

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: (Select all that apply) - Cash for $98,000 - Discount on bonds payable for $2,000 - A debit to loss on bond issuance for $2,000 - Cash for $100,000

- Cash for $98,000 - Discount on bonds payable for $2,000

Identify the characteristics of an annuity. (Select all that apply). - Varying time periods between payment dates - A series of amounts that vary from period to period - Equal time periods between payment dates - A series of amounts that are equal

- Equal time periods between payment dates - A series of amounts that are equal

Identify two ratios commonly used to assess a company's financial risk. (Select all that apply). - Times interest earned ratio - Equity yield ratio - Gross profit ratio - Debt to equity ratio - Current ratio

- 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 ______. (Select all that apply). - a credit to Cash of $6,000 - a debit to Interest expense of $6,000 - a credit to Interest expense of $6,000 - a debit to Interest payable of $6,000

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

Which of the following are common characteristics or provisions of bonds? (Select all that apply) - convertible - secured or unsecured - perpetual or periodic - callable - free or redeemable

- convertible - secured or unsecured - callable

Which of the following are common characteristics or provisions of bonds? - convertible - secured or unsecured - term or serial - perpetual or periodic - indefinite or redeemable

- convertible - secured or unsecured - term or serial

The two types of financing are - equity financing. - investing financing. - operating financing. - debt financing.

- equity financing. - debt financing.

Which of the following statements is correct? - Bonds can be retired only at maturity. - Bonds for which the effective interest rate rises must be retired early. - Bonds may be retired at maturity or 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 Receivable - Notes Payable; Cash - Cash; Bonds Payable - Bonds Payable; Cash

Cash; Bonds Payable

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

False

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

False

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

Term

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 below the bond's face value. - The issue price will be above the bond's face value. - The issue price will equal the bond's face value.

The issue price will be above the bond's face value.

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. - $100,000 - $92,278 - $100,196 - $92,418

$92,278 Rationale:(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: (Select all that apply). A debit to discount on bonds payable for $2,000 A credit to discount on bonds payable for $2,000 A debit to loss on bond issuance A credit to bonds payable for $100,000

- A debit to discount on bonds payable for $2,000 - A credit to bonds payable for $100,000

When a corporation repurchases its bonds from the bondholders, the corporation ___________ the bonds.

retired

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 ______. (Select all that apply) - a debit to Interest expense of $500 - a credit to Interest payable of $500 - a credit to Cash of $500 - a debit to Interest expense of $6,000 - a credit to Cash of $6,000

- a debit to Interest expense of $500 - a credit to Interest payable of $500

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 $99,000 and to Premium on bonds payable of $1,000. - debit to Bonds payable of $100,000 and a credit to Cash of $100,000. - debit to Cash of $100,000 and a credit to Bonds payable of $100,000.

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

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

interest expense

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