Chapter 10 - accounting for long term concepts

The retirement of bonds on the maturity date will

- not affect stockholders' equity - decrease assets

which of the following is a restrictive covenant designed to provide protection for the return of the principal balance of a loan

- restrict additional borrowing - limit dividend payments - limit salary increases

When a bond is issued a premium, the ________ rate of interest is higher than the ____________ rate of interest.

- stated - effective

when a company increases the amount borrowed on a line of credit the amount of

-net income is not affected - net cash flow from financing activities increases

semiannual payment means that interest is paid

2 times per year

a creditor that holds a subordinated debenture has ________ level of security as a general creditor

a lower

on january 1 year 1, dixon company issued bonds with a $50,000 face value at 104. The bonds had a 10 year term and an 8% stated rate of interest. Recognizing the bond issue would

cause the bonds payable account to increase by $50,000

interest expense

cost incurred by the borrower for the use of some other entities' assets

EBIT

earnings before interest and taxes

when bonds sell at a discount, they are _____ than face value

less than

On 1/1, Y1, Ocean Enterpries issued bonds with a face value of 60K, a stated rate of interest of 8% and a five year term to maturity. Interest is payable in cash on 12/31 of each year. The effective rate of interest was 9% at the time the bonds were issued. The bonds sold for $57,666. Ocean Enterprises used the effective interest rate method to amortize bond discount. Based on this information, the amount of the discount that was amortized in Y1 was

$390 $5,190 interest expense is based on effective interest rate x book value - $4,800 interest based on state rate x face value = 390

The journal entry to record issuing bonds payable at face value would include a

- credit to the bonds payable account -debit to the cash account

the journal entry to record a cash payment for interest on a bond that was issued at a discount will include a

- credit to the cash account - credit to the discount on bonds payable account - debit to the interest expense account

the journal entry to record a cash payment for interest on a bond that was issued at a premium

- credit to the cash account - debit to the interest expense account - debit to the premium on bonds payable account

A payment on an installment loan _______________ the amount of total assets, _______________ the amount of net income, and ___________ the amount of cash flow from financial and operating activties.

- decreases - decreases - decreases

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 104. The bonds has a 10 year term and an 8% stated rate of interest. As a result of the bond issue, the ______ would not be affected

- income statement - statement of stockholders' equity

When Grey Company borrowed money by issuing bonds, the balance in the Bonds Payable account ________________ and the balance in the Cash account _________________.

- increased - increased

with each succeeding on an installment loan, the amount of the principal payment ______ while the amount of the interest payment _____

- increases - decreases

during the term of a line of credit, the borrower:

- may decrease the amount borrowed - may increase the amount borrowed

When a company recognizes a cash payment for interest expense on a bond that was issued at a discount:

- net income decrease - total assets decrease

how would issuing a bond to borrow money affect a company's financial statements

- net income not affected - cash flow from financing activities increase

If a company has sales of $17,500,000 , net income of $1,475,000, earnings before interest and taxes of $2,300,000, income tax expense of $695,000, and interest expense of $130K and what is its number of times interest is earned

17.69 times 2,300,000 / 130,000 = 17.69 (there is 17.69 of earnings for every $1 of interest expense)

________ bonds allow the issuing company to redeem (pay off) the bond debt before the maturity date

callable

loans that provide flexible borrowing and repayment options are called

lines of credit

On January 1, year 1, Zoe company issued a $200000, 9%, 5-year term installment loan. The loan required a $51419 annual cash payment on December 31 each year. Based on this information, the principal balance of the loan on January 1, year 2 is

$166,581

on january 1 year 1, dixon company issued bonds with a $50,000face value at 104. The bonds had a 10 year term and an 8% stated rate of interest. Recognizing the bond issue would:

- not affect net income - cause total assets to increase by $52,000

On January 1, year 1, a company-issued at face value a $10,000 bond that carried a 20-year term and an 8% annual interest. Interest payments are made on an annual basis. At the end of year 5, the company made a cash payment for interest. Based on this information the year 2 financial statements would show

- $800 of interest expense 10,000 x 8% = 800 - an $800 cash outflow from operating activities 10,000 x 8% = 800

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 104. The bonds had a 10-year term and an 8% stated rate of interest. Interest is payable in cash on December 31 of each year. Assuming straight-line amortization, which of the following statements regarding the recognition of interest expense on December 31, Year is true?

- Interest expense shown on the income statement is 3800 - The carry value of the bond liability decrease by 200

With respect to a bond liability the lender is called the _____________, while the borrower is called the ________________.

- bondholder - issuer

Assume that a 1000 face value bond sells at a 200 discount. If the bond has a 6.2% stated rate of interest and a 20 year term to maturity, the effective rate of interest is approximately

9% -> Total annual interest = (1000 * 6.2%) + (200 / 20) discount = 72. Effective interest rate = 72 / 800 = 0.09 or 9%

On 1/1, 2013, Hector Incorporated issued bonds with a face value of $120,000, a stated rate of interest of 8% and a 5 year term to maturity. Interest is payable in cash on 12/31 of each year. The effective rate of interest was 7% at the time the bonds were issued. The bonds sold for $124,920. Hector used the effective interest rate method to amortize the premium. Based on this information, the amount of the premium that was amortized in Y1 was

9600 interest expense based on stated rate - 8744 interest expense based on effective rate of interest [effective interest rate (0.7) x book value (124,920)] = 856

which of the following entities DOES NOT publish ratings of the risk of default as guides to bond investors

Federal Government

the premium on bonds payable account is _______ to/from the face value of the bonds payable account to determine the carrying value of the bond liability

added

bond obligations normally

have longer terms to maturity than bank notes

other things being equal, a company will appear to have the least financial risk if its number of times interest is earned ratio is ______

high

if a bond sells at a discount, the effective rate of interest will be _______ the stated rate of interest

higher than

which of the following is deductible for tax purposes

interest expense only

effective rate of interest

interest rate that exists on the day the bonds are issued

stated rate of interest

interest rate written in the bond certificate

bonds that mature on a specified date in the future are called ______ bonds

term

On January 1, Year 1, Dixon Company issued bonds with a 50,000 face value at 96. The bonds has a 10 year term and an 8% stated rate of interest. Based on this information,

the statement of cash flows would show a 48,000 cash inflow from FA. 50,000 - 2,000 discount

the journal entry to recognize a cash payment for interest on a line of credit includes a

- credit to cash - debit to the interest expense account

when a bond discount is amortized using the effective interest rate method, the

- carrying value of the bond liability increases as the bond ages - amount of interest expense recognized increases as the bond ages

A company issued bonds on 1/1, Y1 at face value. At the end of Y1, the company made a cash payment for interest. As a result of this payment, the balance of the

- cash account decreases - interest expense account increases

when a company makes a cash payment for interest due on a line of credit, the amount of ...

- cash flow from operating activities decreases - net income decreases

he discount on bonds payable account is a ________ liability account that is ________ to/from the face value of the bonds payable account to determine the carrying values of the bond liability

- contra - subtracted

the journal entry to record the issue of bonds payable at a discount includes a

- credit to cash - debit to discount on bonds payable - credit to bonds payable

the journal entry to record a payment on an installment loan would include a

- credit to cash - debit to interest expense - debit to installment note payable