Chapter 10 Smartbook

The amount of interest that a bond pays is based on the bond's ______ rate

coupon

The market interest rate on a bond is the interest rate ______.

investors demand on the day a bond is issued and is used to calculate interest expense

Which interest rate should be used in computing the present value of a bond at the date of issuance and the interest expense incurred on the bond?

market

Over the life of a bond, its market price will change as the ______ changes.

market rate

Zero coupon bonds have ______.

no periodic interest payments

If the market interest rates increase during the life of a bond, the issuer will ______ on this bond.

not change the amount of interest paid

A bond's maturity date is the date ______.

on which the bond principal will be repaid in full

When the market interest rate is the same as the stated interest rate, then the bond will sell at ______.

par

On the maturity date, the bondholders of $100,000 of bonds payable that were issued at $90,000 will receive ______.

$100,000 in cash plus the interest owed

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

When bonds with a stated rate of 9% are issued when the market rate of interest is 10%, then ______ on bonds payable will be ______. Multiple choice question.

Discount; debited

True or false: If the market interest rates increase during the life of a bond, the issuer will increase the interest payment on this bond.

False

An advantage to financing with debt is that ______. Multiple choice question.

interest is tax deductible

The cash payment of interest on a $1,000, 12%, 8-year bond that pays interest quarterly and was issued at $980 equals ______.

$1,000 x 12% x 1/4

The Discount on bonds payable account ______.

is a contra account to Bonds payable

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

A $1,000, 6% bond that matures in 10 years is issued for $1,010. The interest is paid semiannually. Each interest payment equals...

30

ABC Corporation issued $100,000, 6% bonds that mature in 10 years for $101,000. The annual interest payments made on these bonds equals

6000

Which of the following statements is correct?

Bonds may sell below, above, or at their face amount.

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

The method of amortizing a bond's discount or premium that reflects the true cost of borrowing by calculating interest expense using the market rate of interest is the ______ amortization.

effective-interest

True or false: If the market interest rates increase during the life of a bond, the issuer will increase the interest payment on this bond.

false

The price of a bond equals the present value of the ______.

principal amount plus the present value of the periodic interest payments

If a bond pays interest semi-annually, when determining the price of a bond, the present value of interest payments will equal the present value of an annuity x ______.

principal x annual stated rate x 1/2

The coupon rate _______ and market rate ______ over the life of a bond. Multiple choice question.

remains the same; changes

The issue (sale) price of a bond equals the ______.

sum of the present value of the principal and interest payments

The reason bonds sell at their face value is because ______.

the market interest rate equals the stated interest rate

True or false: When pricing a bond, the present value of the annuity of the interest payments is added to the present value of the maturity value of the bond.

true

Barry Rich purchased a $1,000, 10% bond which was originally issued at par value by X Company. Barry sold the bond to Ida Bott for $1,010 years later. As a result of this exchange, X Company will ______.

use the same interest rate that existed when the bond was first issued by X Company

A $1,000, 6% bond that matures in 10 years is issued for $1,010. The interest is paid annually. Each interest payment equals...

$60

Discounters, Inc. issued $50,000, 4-year, 6% bonds that pay interest annually on January 1 when the going market interest rate was 7%. On the issue date, the carrying value of bonds, net of discount or including premium, rounded to the nearest $1, is ______.

- $48,307 - $48,307 = ($50,000 x 0.7629) + (($50,000 x 0.06) x 3.3872)

On January 1, Klondike issued 10-year bonds with a stated rate of 10% and a face value of $100,000. The bonds pay interest annually. The market rate of interest is 12%. Calculate the issue price of the bonds. Round to the nearest dollar.

- $88,699 - $88,699 = (5.65022 x $10,000 interest payments) + (0.32197 x $100,000 face value)

Bondable, Inc. issued $100,000, 10-year, 9% bonds that pay interest annually on January 1 when the going market interest rate was 10%. The issue (sale) price of the bonds equals ______.

- $93,851.40 - $93,851.40 = ($100,000 x 0.3855) + (($100,000 x 0.09) x 6.1446)

If a company's 12%, $1,000 bond pay interest quarterly, how much will the bondholder interest payment equal?

- 30 - $30 = $1,000 x 12% per year x 1/4 year

Which of the following are reasons a company would want to issue bonds instead of stock?

- Current stockholders maintain control. - Interest expense is tax-deductible.

Gilmore issued $100,000 face value 6% bonds for $95,000. The journal entry to record the issuance of the bonds would include which of the following entries?

- Debit Discount on bonds payable for $5,000 - Credit Bonds payable for $100,000 - Debit Cash for $95,000

Which of the following information is found on a bond indenture?

- Interest payment dates - Stated rate - Maturity date - Principal

Given no monthly adjustments were made during the year, the December 31 year-end adjusting entry to record the interest on a $100,000, 12% bond that pays interest annually on November 1 and was sold at par value will include ______.

- a $2,000 debit to Interest expense - a $2,000 credit to Interest payable

The interest rate written on a bond is called the _______ rate, ________ rate, _______ rate, or ________ rate.

- contract - stated - nominal - coupon

ABC Company issues a bond with a face value of $100,000 on January 1 for $100,000. 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 ______ of $6,000.

- debit to Interest expense - credit to Cash

The effect of amortizing bonds sold at a ______ the carrying value of Bonds payable to the face or par value by the time the bonds mature.

- discount is to increase - premium is to decrease

The ______ is the interest rate on the date the bonds are issued and used to determine the amount of interest expense.

- effective rate of interest - market rate of interest - yield

The book value of bonds payable ______.

- increases as the bond discount is amortized - decreases as the bond premium is amortized - equals the principal at the maturity date

Default risk is ______.

- less for investment graded bonds with ratings above BBB than for junk bonds - the probability that a bond issuer will not meet the indenture's requirements

Although a bond may require interest payments more than once a year, a bond's coupon rate is ______.

- used to calculate interest payments - always expressed as an annual interest rate

XYZ Company is in the process of issuing bonds. The bonds have a stated interest rate of 4%, which is 2% below 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.

A _________ coupon bond has no periodic interest payments and thus is a deeply discounted bond when issued.

zero

Interest expense is reported on the income statement ______.

below operating income

Discounts on bonds payable are recorded with a debit and are ______.

contra-liabilities

The normal balance for Discount on bonds payable is a ______.

debit

ABC Corporation issued bonds that pay interest each March 1 and September 1. The corporation's December 31 adjusting entry will include a ______.

debit to Interest expense

______ risk is the probability that a bond issuer will not meet the indenture's requirements.

default

If the price of bonds issued by Amazon 3 years earlier increased, then Amazon would ______.

make no entry