ACT210 - Chapter 9

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 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

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

debt; equity

_______ financing refers to obtaining investment from stockholders.

equity

Bonds will be issued a premium if the stated interest rate is

greater than the market interest rate

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

greater than the stated rate

Bonds and leases are normally classified as ______ liabilities.

long-term

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

market interest rate

During the current year, Katie Corp. pays $5,120 on an installment note. The outstanding loan balance at the beginning of the year was $50,000; the effective interest rate is 8%. Which of the statements regarding the installment note balance at the end of the current year is correct?

The balance is $48,880. (50,000 - (5120-4000))

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

Most corporate bonds pay interest

semiannually

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

stated

A company's capital structure refers to

the mixture of debt and equity used to finance the company.

The price of a bond includes

the present value of the face amount plus the present value of the periodic interest payments

Which of the following are typically shown in an amortization schedule related to an installment notes payable?

- The cash paid each payment period - The carrying value of the note at the end of the period - The carrying value of the note at the beginning of the period

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

The mixture of debt financing and equity financing a company uses is referred to as the company's _______ structure.

capital

_______ financing refers to borrowing money from creditors

debt

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

installment

Debt is considered a lower cost method of financing than equity because

interest on debt is tax deductible

The _______ rate 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; market

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

stated (or face)

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.

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 (or nominal)

A corporation will issue bonds when

the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan.

On December 31, Katie Corp. records a journal entry related to an installment note that includes a debit to interest expense for $4,000, and a debit to notes payable for $9,000. Katie's journal entry should also include a credit to cash for:

$13,000. (4,000 + 9,000)

Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:

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

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

Which of the following are methods of long-term financing with debt?

- Leases - Bonds - Notes payable

Periodic payments on installment notes typically include

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

In order to expand its business, Mueller Inc. is borrowing $1 million from its bank. Mueller is utilizing this type of financing:

Debt

In order to expand its business, Mueller Inc. is selling $10 million in common stock. Mueller is utilizing this type of financing:

Equity

When pricing a bond, the present value of the interest payments is added to the present value of the maturity value of the bond.

True

When is it more economical for a company to borrow funds by issuing bonds?

When the interest savings exceed the additional bond issuance costs

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

a discount

Glueck Company issues bonds with a stated rate of 5% and a market rate of 4%. Glueck's bonds will issue at

a premium

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:

credit to Notes Payable for $24,000

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.

An advantage to financing with debt is that

interest is tax deductible

A bond will be issued at a premium when the market rate of interest is ______ the stated rate.

less than

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

A corporation that wishes to borrow from the general public rather than a bank will issue

bonds

At the beginning of the year, Petra owes $10,000 on an installment notes payable, which has an interest rate of 6%. At the end of the year, Petra makes a payment of $2,000. After the payment, the carrying value of the installment notes payable will be:

$8,600. (10000 - (2000 - (10000 x .06)))

On December 31, Leann Corp. paid $5,120 on an installment note that requires annual payments. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. The journal entry to recognize the payment should include debits to

- notes payable for $1,120. - interest expense for $4,000.

The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

False. The note must be split into its current and long-term portions

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

market

XYZ Company has a 10 year installment note requiring $5,000 to be paid within the current year and $45,000 to be paid over the remaining 9 years. How is this installment note reported in the balance sheet of XYZ Company?

$5,000 current note payable; $45,000 long-term note payable

Which of the following are typically shown in an amortization schedule related to an installment notes payable requiring period payment of interest and principal?

- The cash paid each payment period - Interest expense based on the beginning period carrying value and the effective rate of the loan - The carrying value of the note at the end of the period - The decrease in the carrying value of the note