Accounting chapter 9
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