Accounting chapter 9

Ace your homework & exams now with Quizwiz!

premium bonds

Interest expense decreases each interest period

Discounted bonds

Interest expense increases each interest period

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

The issuing company can pay off the bonds at any time

callable

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

contra liability

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

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

false

A bond will be issued at a discount when the market rate of interest is

greater than the stated rate.

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

market interest rates decreased.

Which of the following financial ratios provides information about the income generated per dollar of assets?

return on assets

Bonds are backed by collateral

secured

Bonds that are backed by collateral are ______.

secured

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

secured

Which of the following are common characteristics or provisions of bonds?

secured or unsecured convertible callable term or serial

Corporate bonds most often pay interest ______

semiannually

Bonds that mature in installments

serial

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

stated

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

stated

Callable bonds can be redeemed at the choice of:

the bond issuer.

The true interest rate used by investors to value a bond issue is referred to as the:

market interest rate

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

$200,000

The carrying value at maturity is equal to the face amount of bonds issued at:

face amount, discount, and premium

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) ______ bond.

unsecured

Most corporate bonds pay interest

semiannually

An early extinguishment of debt occurs if bonds or any type of debt are retired prior to the ______ date.

maturity

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

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

Identify the characteristics of an annuity.

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

The higher the debt to equity ratio is for a company, the ______ the risk of bankruptcy is for that company.

higher

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

term

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

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.

The return on assets measures the amount of _______ generated for each dollar of assets.

income

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

installmement

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

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

market

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

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

convertible

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.

$88,699

Issued at a premium

Carrying value decreases over time and is equal to face amount at maturity

Issued at face amount

Carrying value does not change and is equal to issue price

Issued at a discount

Carrying value increases over time and is equal to face amount at maturity

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

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.

Periodic payments on installment notes typically include:

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

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

a single large investor.

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

debt, equity

The possibility that a company will be unable to pay its loans and its interest payments when due refers to the company's ______ risk.

default

The possibility that a company will be unable to pay its bonds payable and the related interest when due is commonly referred to as:

default risk

Margot Inc. issues bonds with a stated rate of 5%; the company's market interest rate is 6%. The bonds will issue at:

discount

If bonds are retired before the maturity date, this is considered a(n)

early extinguishment of debt.

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.

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Credit discount on bonds payable $705 Credit cash $5,000 Debit interest expense $5,705

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

annuity

On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?

Credit cash $5,000

The debt to equity ratio is calculated as

total liabilities divided by total stockholders' equity.

Most bonds issued today are ______.

unsecured

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

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

Bonds may be retired at maturity or retired early.

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:

Bonds payable of $100,000 Less discount on bonds payable of $1,200

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

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 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)

bond

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

Convertible bonds allow the lender to convert each bond into:

common stock

Bonds that can be exchanged for shares of stock in the issuing company

convertible

The two types of financing are

debt financing. equity financing.

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.

present value; market

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.

retired

A(n) _____ bond is backed by a lien on specified real estate owned by the issuer.

secured

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

secured

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

stated

Bond issue that matures on a single date

term


Related study sets

SCULPTURE Unit Test Review (Introduction to Art)

View Set

WISCONSIN LIFE INSURANCE LAW 0820

View Set

Combo with power point lesson 3 and 5 others

View Set

Study Guide for Module 7 - Exploring Creation With Physical Science

View Set

Fundamentals of Nursing II - Exam 1

View Set