Chapter 14: Bonds and Long-Term Notes
Market Rate
A bond issue will be priced so that an investor purchasing the bonds will earn an effective rate of return on the investment equal to the ___________ _________.
B
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n) Multiple choice question. A. serial bond B. debenture bond C. indenture bond D. secured bond
Discount
A bond that sells for less than its face amount is sold at a __________.
B
A challenge with debt instruments is that the financial community continually develops increasingly ______ ways to write financial instruments to satisfy the evolving tastes of both debtors and creditors. Multiple choice question. A. transparent B. complex C. plain D. simplistic
B
A common reason for redeeming a bond prior to its maturity date is that Multiple choice question. A. the market price of bonds decreased. B. market interest rates decreased.
C
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at: Multiple choice question. A. a premium B. face amount C. a discount
C
Bonds that permit bond holders to exchange their bonds for common stock are referred to as _____ bonds. Multiple choice question. A. stock B. redeemable C. convertible D. exchangeable E. treasury
Serial
Bonds that retire in installments during all or part of the life of the bond issue are called _________ bonds.
C
Bonds that systematically mature over a succession of years are referred to as Multiple choice question. A. graded bonds B. step bonds C. serial bonds D. callable bonds
A
During the current period, Roberts recognized interest expense of $9,400 and paid interest of $9,000 related to its discounted bonds. The amortization recognized during the current period was: Multiple choice question. A. $400 B. $9,400 C. $9,000 D. $0
A
For the current interest period, Kuhn Corporation's accountant correctly recognized interest expense of $5,350 relating to Kuhn's bonds and paid $6,000 in interest to bond holders. The journal entry recording the interest also must have included a: Multiple choice question. A. debit to premium on bonds payable B. credit to discount on bonds payable C. debit to discount on bonds payable D. credit to premium on bonds payable
A
Generally, liabilities are valued at their Multiple choice question. A. present value. B. fair market value. C. nominal amount. D. net realizable value.
C
Glueck Inc. issues $5 million face amount bonds at $5.2 million; interest of $100,000 is paid semi-annually for five years. At the maturity date, Glueck will pay bond investors: Multiple choice question. A. $6 million B. $5.2 million C. $5 million
B
A bond feature that aims at making the bonds more attractive to investors is the ____ feature. Multiple choice question. A. call B. conversion C. redeemable
B
Accounting for convertible bonds subsequent to issuance is the same as accounting for _____. Multiple choice question. A. common stock B. non-convertible bonds C. bonds with detachable warrants
Semiannually
Although the interest on a bond is often stated as an annual rate, interest is frequently payable ______________.
A E
Bond issue costs Multiple select question. A. increase the effective interest rate of borrowing. B. increase the cash proceeds from the issuance of debt. C. decrease the effective interest rate of borrowing. D. do not affect the cash proceeds from the issuance of debt. E. reduce the cash proceeds from the issuance of debt.
B E
Bond issue costs: Multiple select question. A. decrease the effective interest rate of borrowing. B. reduce the cash proceeds from the issuance of debt. C. do not affect the cash proceeds from the issuance of debt. D. increase the cash proceeds from the issuance of debt. E. increase the effective interest rate of borrowing.
A
Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the: Multiple Choice A, Face amount price less any unamortized discount or plus any unamortized premium. B. Current bond market price. C. Face amount less any unamortized premium or plus any unamortized discount. D. Face amount less accrued interest since the last interest payment date.
Sinking Fund
Bonds requiring pre-specified, year-by-year redemptions are called _________ ________ debentures.
A
Changes in the current ______ often represent a major contributor to changes in the fair value of bonds. Multiple choice question. A. market interest rate B. stated interest rate C. coupon interest rate
Stock
Convertible bonds are retired when bondholders choose to convert them into shares of ___________.
B
Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the Multiple choice question. A. equity yield ratio. B. debt to equity ratio. C. debt ratio. D. debt yield ratio.
A
Gruenwald Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 25 shares of common stock. At the bond issue date, the company's common shares trade for $44 per share. At the date of issue, Gruenwald should recognize an addition to equity of Multiple choice question. A. $1,000,000. B. $0. C. $44,000,000. D. $44,000.
C
If a company can earn a return on borrowed funds in excess of the cost of borrowing the funds the company achieves Multiple choice question. A. high leverage. B. low leverage. C. favorable leverage. D. a positive return.
C
If an asset is exchanged for notes payable and the stated interest rate does not closely reflect the market rate at time of negotiation, the market rate should be established with reference to the: Multiple choice question. A. return on the company's debt B. return on the company's equity C. value of the asset or service exchanged D. interest rate stated on the note
Implicit
In situations when the interest rate is not readily apparent, the rate used to measure and account for the transaction should be the ________ interest rate.
C
Mitchell's investment in convertible bonds has a net book value of $1.4 million when Mitchell converts the bonds to common stock. The fair value of the common stock is $1.5 million. Mitchell should recognize its investment in common stock at Multiple choice question. A. $1.45 million B. $100,000 C. $1.4 million D. $1.5 million
B
Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Margarita, Inc., purchased 2,500 of the bonds and converts them after 2 years. At that time, the balance in the premium on bond investment is $75,000. Margarita should recognize this conversion by debiting investment in common stock for A. $2,500,000 B. $2,575,000 C. $2,425,000
C
Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by crediting Multiple choice question. A. gain on bond conversion for $1,100,000. B. common stock for $5,150,000. C. common stock for $6,250,000.
B
On January 1, 2024, an investor paid $328,000 for bonds with a face amount of $395,000. The stated rate of interest is 8% while the current market rate of interest is 10%. Using the effective interest method, how much interest income is recognized by the investor in 2024 (assume annual interest payments and amortization)? rev: 02_26_2021_QC_CS-252921 Multiple Choice A. $26,240. B. $32,800. C. $31,600. D. $39,500.
B
On January 1, 20X1, Greenbaum Corp. borrows $500,000 cash from First National Bank and issues a 2-year, $500,000 promissory note. Interest of $10,000 is payable semi-annually on June 30 and December 31. On the date of issuance, Greenbaum Corp. should credit Multiple choice question. A. accounts payable for $500,000. B. notes payable for $500,000. C. accounts payable for $510,000. D. notes payable for $540,000.
C
On January 1, 20X1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On the date of issuance, First Rate Bank should debit "notes receivable" for Multiple choice question. A. $324,000. B. $372,000. C. $300,000.
A
On January 1, Greenbaum Corp. borrows $500,000 cash from First National Bank and issues a 2-year, $500,000 promissory note. Interest of $10,000 is payable semi-annually on June 30 and December 31. On December 31, Greenbaum Corp. should recognize Multiple choice question. A. interest expense of $10,000. B. interest expense of $20,000 C. prepaid interest of $20,000 D. prepaid interest of $10,000
B
On January 1, Parma, Inc. borrowed $100,000 cash from First National and issued a two-year promissory note in that amount. Interest of $5,000 was payable semiannually on June 30 and December 31. Which account will be debited when Parma records the entry relating to each of the four interest payments? A. Cash B. Interest expense C. Interest revenue D. Notes payable
C
On January 1, Smite Corp. borrows $300,000 cash from First Rate Bank and issues a 3-year, $300,000 promissory note. Interest of $12,000 is payable semi-annually on June 30 and December 31. On December 31, Smite Corp. should debit Multiple choice question. A. notes payable for $12,000. B. notes payable for $24,000. C. interest expense for $12,000. D. interest expense for $24,000.
A
On January 2, 20X1, Merchant Company purchases $100,000 bonds at 98. The bonds mature in five years and pay 6% interest semi-annually on June 30 and December 31. Merchant decides to utilize the straight-line method of amortization. On December 31, 20X1, Merchant should credit interest revenue for: Multiple choice question. A. $3,200 B. $2,800 C. $3,000
C
On January 2, 20X1, Merchant Company purchases $100,000 bonds at 98. The bonds mature in five years and pay 6% interest semi-annually on June 30 and December 31. Merchant decides to utilize the straight-line method of amortization. On December 31, 20X1, Merchant should debit the "discount on bond investment" account for: Multiple choice question. A. $400 B. $3,100 C. $200
A
Orange Company issues zero-coupon, 5-year bonds with a face amount of $400,000 to yield 6%. At what price did the bonds sell? Multiple choice question. A. $298,904 B. $400,000 C. $535,290 D. $223,358
C
Otto Company purchases bonds with a face amount of $80,000 for $84,000. Which of the following journal entries would be correct? Multiple choice question. A. Debit bond investment for $80,000; debit loss for $4,000; credit cash for $84,000. B. Debit investment in bonds for $80,000; credit cash for $80,000. C. Debit investment in bonds $80,000; debit premium on bond investment for $4,000; credit cash for $84,000.
Increase
Periodic amortization of bond discounts ___________ bond carrying value
Decrease
Periodic amortization of bond premiums ___________ bond carrying value
B
The amount of interest paid on bonds is calculated by multiplying ______ of the bonds with the ____ rate. Multiple choice question. A. face amount; stated B. outstanding balance; stated C. outstanding balance; effective D. face amount; effective
B
The decision of whether the straight-line method of allocating bond discount or premium is acceptable should be guided by whether or not the straight-line method would tend to Multiple choice question. A. reduce reporting costs. B. mislead investors. C. be easier to apply. D. improve net income.
A
The fundamental reason why companies issue convertible bonds is to Multiple choice question. A. make the bonds more attractive to investors. B. ward off hostile takeovers. C. improve their debt equity ratio.
C
The interest rate on notes payable typically is equal to the ____ rate. Multiple choice question. A. prime B. credit C. market D. short-term borrowing
C
The interest rate on notes payable typically is equal to the ____ rate. Multiple choice question. A. short-term borrowing B. credit C. market D. prime
D
The interest rate that is printed on the bond certificate is referred to as any of the following except: Multiple Choice A. Stated rate. B. Contract rate. C. Nominal rate. D. Effective rate.
Bonds Payable
The mirror image a liability is an asset. The mirror image of investments in bonds is ___________ ____________.
B
The most common type of corporate debt is Multiple choice question. A. notes payable. B. bonds. C. common stock
Substance Over Form
The phrase used to indicate that accounting and reporting should reflect the underlying economic essence of a transaction is __________ _______ ___________
Net Income
The return on assets is calculated by dividing ________ ____________ by total assets
Net Income
The return on shareholders' equity is calculated by dividing __________ ___________ by total shareholders' equity
Credit
The risk that bondholders will not receive interest and principal payments when due is ___________ risk
D
The unamortized balance of discount on bonds payable is reported in the balance sheet as: Multiple Choice A. A prepaid expense. B. An expense account. C. A current liability. D. A contra-liability.
C
This ratio may provide information about a company's default risk. Multiple choice question. A. Return rate B. Asset turn over C. Debt to equity D. Profit margin
B
Touché, Inc. issued 9%, $1,300,000 bonds for $1,600,000. Touché reacquired these bonds for $1,365,000 when their book value was $1,436,500. What was the gain or loss on the early extinguishment of this debt? A. Loss of $65,000 B. Gain of $71,500 C,. Loss of $71,500 D. Gain of $163,500
True
True or False: If a company chooses the option to report its bonds at fair value, then it reports changes in fair value in its income statement unless the changes are attributable to changes in credit risk.
False
True or False: Periodic interest expense is the stated interest rate times the amount of debt outstanding during the period.
False
True or False: The initial selling price of bonds represents the sum of all the future cash outflows required by the obligation.
Market Rate
Under both US GAAP and IFRS, if the fair value of bonds is not readily determinable, the fair value may be calculated as the present value of the future cash flows using the __________ ______ of interest
B
Using the effective interest method, the bond issuer calculates interest expense based on the: Multiple choice question. A. expected future value of the bonds B. outstanding balance of the bonds C. face amount of the bonds
A
Which of the following best describes the essence of the concept "substance over form"? Multiple choice question. A. Accounting for a transaction is primarily determined by the essence of the transaction. B. Accounting for a transaction is primarily determined by the outward appearance of the transaction. C. Accounting for a transaction is primarily determined by the written contract.
A D
Which of the following costs are associated with issuing both publicly and privately placed bonds? (Select all that apply.) Multiple select question. A. accounting fees B. NYSE filing fees C. SEC filing fees D. legal fees
C
Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond consistent with IFRS? Multiple choice question. A. The value of the conversion feature is recognized as net income. B. The value of the conversion feature is not recognized separately. C. The value of the conversion feature is recognized as equity.
A
Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond? Multiple choice question. A. The value of the conversion feature is not recognized separately. B. The value of the conversion feature is recognized as additional paid-in capital.
C
Which of the following represents an important difference between bonds with detachable warrants and convertible bonds? Multiple choice question. A. Bonds with detachable warrants typically sell for less than convertible bonds. B. The warrants give the holder the option to purchase additional bonds at a favorable price. C. The warrants can be separated from the bonds.
A D
Which of the following statements about financial statement disclosures appropriate to long-term debt are true? (Select all that apply.) A. Both interest expense and interest revenue are reported among operating activities on the statement of cash flows. B. In a statement of cash flows, issuing bonds or notes are reported as cash flows from investing activities by the issuer and cash flows from financing activities by the investor. C. Long-term debt is reported at its face amount accompanied by a separate valuation account for the discount or premium. D. The fair value of financial instruments must be disclosed either in the body of the financial statements or in disclosure notes.
B
Which of the following statements is correct regarding the cost associated with issuing privately placed corporate bonds? Multiple choice question. A. They are more costly to issue than publicly offered bonds. B. They are less costly to issue than publicly offered bonds.
A
Which of the following statements is correct relating to bonds that were issued two years ago with an effective interest rate that was lower than the current effective interest rate? Multiple choice question. A. The bonds' book value is probably not equal to their current market value B. The bonds' book value is equal to their current market value
A
Which of the following statements regarding the times interest earned ratio is correct? Multiple choice question. A. It indicates the margin of safety provided to creditors. B. It provides assurance that the loan will be paid back at maturity.
A D
Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply.) Multiple select question. A. It indicates the company's margin of safety in terms of paying its fixed interest. B. It indicates the likelihood the loan will be paid back at maturity. C. It indicates the leverage of the company. D. It indicates the company's ability to pay its cost of borrowing
Secured
A __________ bond is backed by a lien on specified real estate owned by the issuer.
A
Jennifer, an Intermediate Accounting student, wants to determine whether a particular bond issue will sell at face amount, a premium, or discount without calculating the actual issue price. Jennifer should compare the ____ and the ____. Multiple choice question. A. stated interest rate; market interest rate B. expected return; estimated return C. face amount; estimated sales price
B
Mauser Company issues $1 million face amount, zero-coupon 10-year bonds to yield 4% interest. At the date of issue, what issue price will Mauser receive for its bonds? Multiple choice question. A. $1,400,000 B. $675,560 C. $1,000,000
C
Milky Company's 5%, $100,000 face amount bonds have a carrying value of $98,000. When the bonds were issued two years ago, the effective interest rate was 6%. The bonds pay interest semi-annually on April 1 and October 1. In the December 31 adjusting entry, Milky Company should recognize interest expense of Multiple choice question. A. $5,000 B. $0 C. $1,470 D. $2,940 E. $2,500
C
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to Multiple choice question. A. pay interest if the company is profitable. B. repay a certain amount at a date to be determined in the future. C. repay a certain amount at a specific date. D. reacquire the bonds when interest rates fall. E. reacquire the bonds when interest rates rise.
C
On April 1, year 1, Norman Company issues $200,000 of 6% bonds. The market rate of interest is 6%. Interest of $6,000 is payable semi-annually on June 30 and December 31. The indenture is dated January 1, year 1, and the bonds mature 5 years from that date. On the date of issue, the price of the bonds will be equal to Multiple choice question. A. $206,000. B. $200,000. C. $203,000.
A
On January 1, 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 Multiple choice question. A. $200,000. B. $212,000. C. $260,000.
D
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 4%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). Multiple choice question. A. $200,000 B. $183,777 C. $215,567 D. $217,966
B
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars). Multiple choice question. A. $200,000 B. $191,684 C. $143,811 D. $167,199
D
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bonds issued for $95,842 with an effective interest rate of 7%. Effective interest recognized on June 30, 20X1, will be equal to (round to the nearest full dollar) Multiple choice question. A. $3,000. B. $6,709 C. $2,875 D. $3,354
B
One of the advantages associated with bonds is that a relatively large amount of debt can be Multiple choice question. A. financed over a short-term horizon. B. broken into small portions. C. obtained from a single source.
D
The creditworthiness of the company issuing the bonds will affect the company's Multiple choice question. A. ability to redeem its outstanding bond issue B. stated interest rate C. return on equity D. effective interest rate
A
The difference between the effective interest and the interest paid represents Multiple choice question. A. amortization of a discount or premium. B. a gain or loss due to changes in market interest rates. C. the time value of money.
C
The effective interest method applies the accrual concept by Multiple choice question. A. recording interest expense at the stated rate. B. recording interest expense for the amount of cash interest paid. C. recording interest expense periodically at the effective rate.
A
The effective interest method is an application of which principle or concept? Multiple choice question. A. accrual accounting B. revenue recognition C. going concern D. periodicity concept
A
The periodic interest paid by the issuer of a bond is referred to as the Multiple choice question. A. stated rate. B. yield rate. C. effective rate. D. market rate.
A
The requirements of a future payment of a specific or estimated amount of cash, at a specific or projected date are characteristics of debt. Identify another common characteristic. Multiple choice question. A. Periodic interest is incurred B. Periodic principal payments must be made C. Periodic interest must be paid
B
The specific promises made to bondholders are described in a document referred to as a bond Multiple choice question. A. warrant. B. indenture. C. debenture. D. option contract.
False
True or false: The carrying value of bonds at any date after issuance should always be equal to the fair value of the bonds.
B D
Which of the following are correct regarding bonds? (Select all that apply.) Multiple select question. A. They obligate the issuing company to repay the bonds when market interest rates decrease. B. They obligate the issuing company to repay the bonds at a specific date. C. They obligate the issuing company to pay an estimated amount. D. They obligate the issuing company to pay a specific amount. E. They obligate the issuing company to repay the bonds when interest rates increase.
D
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $191,684 with an effective interest rate of 7%. Effective interest recognized on June 30, 20X1, will be equal to (round to whole dollars) Multiple choice question. A.$13,418 B. $6,000. C. $5,751. D. $6,709.
A
Abby Corp. purchases a machine and signs a $20,000 note. The note requires periodic payments of 8% interest. The equipment would normally sell for $19,000 in cash. This implies that the company's implicit interest rate probably is Multiple choice question. A. higher than 8%. B. equal to 8%. C. lower than 8%.
B
Adams Corporation's balance sheet reports $100 million in bonds payable. Felix Company who purchased some of Adams' bonds will report the bonds as: A. equity. B. an investment. C. a receivable. D. a prepaid asset.
C
Amortization of bond discounts results in the bond being valued on the balance sheet at the Multiple choice question. A. maturity value of the bonds plus the remaining interest payments. B. maturity value of the bonds. C. present value of the associated future cash flows.
Future
As a result of applying the effective interest method, the carrying value of bonds is equal to the present value of the ___________ cash flows.
B
As part of the disclosures relating to long-term liabilities, companies should disclose the aggregate amounts payable for each of the next Multiple choice question. A. ten years B. five years C. three years
C
Assume that Levier Corporation elected the fair value option for reporting bonds and the bonds decreased in fair value during the year. Which of the following statements is correct? A. The entire gain is reported as part of other comprehensive income (OCI). B. The entire gain is reported as part of net income. C. The portion of that that gain that is a result of a change in general interest rates is reported as part of net income, while any portion of that gain that is a result of a change in the "credit risk" of the debt is reported as other comprehensive income (OCI). D. The portion of that that gain that is a result of a change in general interest rates is reported as part of as other comprehensive income (OCI), while any portion of that gain that is a result of a change in the "credit risk" of the debt is reported as part of net income.
B
At the time of maturity, the repayment amount for bonds is equal to the: Multiple choice question. A. face amount less unamortized discount B. face amount of the bonds C. face amount plus unamortized premium
Tax Exempt
Because investors in zero-coupon bonds must declare interest revenue without receiving periodic cash receipts, most investors in zero-coupon bonds have ____________-__________ status.
B
Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as Multiple choice question. A. secondary B. subordinate C. unsecured D. liquidating
C
Bond holders who are not entitled to receive any liquidation payments until claims of other specified debt issues are satisfied must have purchased indentures that are referred to as Multiple choice question. A. secondary B. unsecured C. subordinate D. liquidating
C
Bond issue costs typically are incurred related to: Multiple choice question. A. publicly sold bonds only B. privately placed bonds only C. both privately placed and publicly sold bonds
D
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds. Multiple choice question. A. debenture B. indenture C. real estate D. mortgage
D
Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as ____ bonds. Multiple choice question. A. treasury B. convertible C. exchangeable D. callable
Zero
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ________ coupon bonds
Zero
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as __________ coupon bonds.
B
Burns Company issues bonds for their face amount of $2 million. Over the life of the bonds, the company pays a total of $3.2 million to bondholders. What can you deduce from these facts regarding the difference between the face amount and the bonds' cash flows? Multiple choice question. A. The $1.2 million represents a premium. B. The $1.2 million represents the time value of money. C. The $1.2 million represents a discount.
B
Choose the statement that best describes the type of financial instruments that are commonly issued in today's markets. Multiple choice question. A. "Exotic" financial instruments currently are prohibited by the SEC. B. "Exotic" financial instruments continue to be developed and offered to investors. C. Capital markets have abandoned "exotic" financial instruments.
A B C
Common methods used by bond issuers to induce bond holders to convert their bonds to common stock are (Select all that apply.) Multiple select question. A. additional cash B. favorable conversion ratios C. stock warrants D. promises of additional dividends E. discounts on bonds payable
B
If a bond issues for 99, this means that the company issued the bond at Multiple choice question. A. face amount. B. a discount. C. a premium.
B
Consistent with IFRS, if the fair value of convertible bonds for which no active market exists cannot be determined, the value of the bonds can be calculated based on the Multiple choice question. A. face amount of the bonds plus interest B. present value of the bonds' cash flows using the market interest rate C. present value of the bonds' cash using the stated interest rate D. residual value between issue price and fair value of the conversion feature
C
Effective interest expense is calculated as Multiple choice question. A. the effective rate times the face value of the debt outstanding during the period B. the stated rate times the face value of the debt outstanding during the period C. the effective rate times the carrying value of the debt outstanding during the period
C
Gregory Company issues $5 million face amount bonds. The bond indenture is held by a large national bank. Which of the following explains why a bank is holding the indenture? Multiple choice question. A. Bond issuers are not permitted to enter into separate agreements with bondholders. B. A bank must guarantee a new bond issue. C. It is impractical for the issuer to enter into an agreement with each bondholder.
B
Hatter Company's new bond issue with face amount of $7 million sells for $6.8 million. Which of the following facts may explain why the bonds sell at a discount? Multiple choice question. A. Hatter Company must have issued its bonds after the first interest payment was due. B. Hatter Company's stated interest rate must be lower than that of competing companies in the bond market. C. Hatter Company's reputation must have been recently impaired.
C
If a bond issues for 102, this means that the company issued the bond at Multiple choice question. A. face amount. B. a discount. C. a premium.
B
In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n) Multiple choice question. A. investing activity. B. operating activity. C. financing activity.
A
Interest expense is: Multiple Choice A. The effective interest rate times the amount of the debt outstanding during the interest period. B. The stated interest rate times the amount of the debt outstanding during the interest period. C. The effective interest rate times the face amount of the debt. D. The stated interest rate times the face amount of the debt.
A
Jones Company wants to improve its debt equity ratio and offers holders of convertible bonds additional consideration for converting their bonds to common stock. During 20X1, the company paid $500,000 for such consideration. This amount should be Multiple choice question. A. recognized as an expense when paid. B. capitalized and amortized over the life of the remaining bonds. C. deducted from paid-in capital.
A
Margot wants to calculate the installment payment amount for a new installment notes payable of $200,000, which is due in ten years. Based on the interest rate, Margot determined that the applicable present value factor is 8.1109. Rounding to whole dollars, the installment payment amount is: Multiple choice question. A. $24,658 B. $26,452 C. $25,000 D. $20,000
A B C
Nattel Corp. issues 10,000, $1,000 face amount bonds at 104. Each bond can be converted into 25 shares of no-par common stock. Two years after issuance, when the share price is $50, half of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. If Nattel uses the market value method, it should recognize the conversion by debiting (Select all that apply.) Multiple select question. A. loss on bond conversion for $1,100,000. B. premium on bonds payable for $150,000. C. bonds payable for $5 million. D. additional paid-in capital for $150,000.
B
Neumann Corp. compares three different investment opportunities. Opportunity A has $1 million in debt and $2 million in equity; Opportunity B, $1.5 million in debt and $2 million in equity; Opportunity C, $1 million in debt and $2.5 million in equity. If the companies are equal in all other aspects, which of the companies tends to have the lowest investment risk? Multiple choice question. A. Company A B. Company C C. Company B
C
Norbert purchases a piece of equipment and signs a note with a very low interest rate that is unlikely to reflect current market conditions. Norbert should estimate the appropriate market rate with reference to the Multiple choice question. A. interest rate stated in the note. B. maturity amount of the note. C. value of the purchased equipment.
A
Norton Company is planning to sell $5 million face bonds and engages the services of an underwriter. Which of the following statements is correct regarding the underwriter? Multiple choice question. A. The underwriter bears the risk associated with being able to sell the bonds to individual investors. B. Norton Company bears the risk associated with being able to sell the bonds to individual investors.
C
On December 15, 20X1, Fuller Company repays its $500,000 promissory notes payable to Premier Lending Company. On that date, Fuller should _____ notes payable and Premier Lending should ____ notes receivable. Multiple choice question. A. debit; debit B. credit; credit C. debit; credit D. credit; debit
C D E
On December 31, 20X1, Werner Inc. has $1 million face amount, 6% bonds outstanding. The bonds were issued at a discount and pay interest semi-annually on March 31 and September 30. On 12/31/X1, Werner Inc. should (Select all that apply.) Multiple select question. A. debit discount on bonds payable B. not make any entry related to the bonds. C. debit interest expense D. credit interest payable E. credit discount on bonds payable
A D F
On December 31, 20X1, Werner Inc. has $1 million face amount, 6% bonds outstanding. The bonds were issued at a discount and pay interest semi-annually on March 31 and September 30. On 3/31/X2, Werner Inc. should (Select all that apply.) Multiple select question. A. debit interest expense B. credit interest payable C. credit cash D. credit discount on bonds payable E. not make any entry related to the bonds. F. debit interest payable G. debit discount on bonds payable
A C
On December 31, Katie Corp. receives $5,120 on an installment note receivable. The outstanding loan balance on January 1 was $50,000; the effective interest rate is 8%. Payments are received annually. The journal entry to recognize the receipt of this payment should include credits to Multiple select question. A. installment note receivable for $1,120. B. interest revenue for $5,120. C. interest revenue for $4,000. D. installment note receivable for 5,120.
C
On January 1, 20X1, 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. All the bonds are privately placed with one investor. On the date of issue, the investor should recognize an investment in bonds payable of Multiple choice question. A. $260,000. B. $212,000. C. $200,000.
D
On January 1, 20X1, Water Company issues $100,000 of 6% bonds. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years and sell for 95,842. On June 30, 20X1, the company recognizes interest expense of $3,354. As a result of recognizing this transaction, the bond carrying value will Multiple choice question. A. not change. B. increase by $709. C. decrease by $354. D. increase by $354. E. decrease by $709.
C
On January 1, Arnold Corp issues $100,000 of 7% bonds. Interest of $3,500 is payable semi-annually on June 30 and December 31. The bonds mature in 10 years. The market yield for bonds of similar risk and maturity is 5%. Calculate the issue price of the bonds (round the result to whole dollars). Multiple choice question. A. $81,307 B. $100,000 C. $115,589 D. $107,000
B
On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for? Multiple choice question. A. Reduce the cash proceeds and increase the bonds payable account B. Reduce the cash proceeds and increase the discount and debt issue costs account C. Increase the cash proceeds and increase the discount and debt issue costs account
A
On January 2, 20X1, Hauser Company issues $2 million face amount, 10-year bonds. Issue costs associated with these bonds are $100,000. How are the issue costs accounted for? Multiple choice question. A. Reduce the cash proceeds and increase the discount and debt issue costs account B. Increase the cash proceeds and increase the discount and debt issue costs account C. Reduce the cash proceeds and increase the bonds payable account
B
On January 2, 20X1, MLK Corp. issued $10 million of 8% bonds at 104. Each $1,000 bond is accompanied by 25 stock warrants. Each warrant permits the holder to purchase one share of no-par common stock for $20. Immediately after issuance, the warrants were listed on the stock exchange for $2 each. During 20X1, half of the warrants were exercised. As a result, MLK will debit equity-stock warrants for Multiple choice question. A. $270,000 B. $250,000 C. $200,000
C
On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market interest rate is 7%. The bond issues for $191,684. On June 30, the company should recognize a discount amortization of Multiple choice question. A. $249. B. $0. C. $709. D. $1,418
A
On January 2, 20X1, Price Co. called its $800,000, 8% bonds with a carrying value of $790,000. The call price is $788,000. The bonds originally were issued to yield 9%. On the call date, the company should recognize Multiple choice question. A. a gain of $2,000. B. a gain of $12,000. C. a loss of $12,000. D. a loss of $2,000.
A
On January 2, 20X1, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and December 31. Yves decides to utilize the straight-line method of amortization. On December 31, 20X1, Yves should credit the "discount on bonds payable" account for Multiple choice question. A. $1,000. B. $500. C. $10,000.
C
On January 2, 20X1, Yves Company issues $500,000 bonds at 98. The bonds mature in 5 years and pay 6% interest semi-annually on June 30 and December 31. Yves decides to utilize the straight-line method of amortization. On December 31, 20X1, Yves should debit interest expense for Multiple choice question. A. $14,000. B. $15,000. C. $16,000.
A
On January 2, MLK Corp. issued $10 million of 8% bonds at 104. Each $1,000 bond is accompanied by 25 stock warrants. Each warrant permits the holder to purchase one share of no-par common stock for $20. Immediately after issuance, the warrants were listed on the stock exchange for $2 each. MLK should recognize equity from the sale of bonds of Multiple choice question. A. $500,000. B. $1,150,000. C. $400,000. D. $0
B
On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effective interest rate is 8%. The bonds pay semi-annual interest of 7% on January 1 and July 1. On December 31, 20X1, the company should credit Multiple choice question. A. interest expense for $7,800. B. bond discount for $800. C. interest expense for $7,000.
B
On November 1, 20X1, Chocolate Company issues $100,000, 6% interest bonds at face amount. Interest is payable on April 30 and October 31. On 12/31/X1, the company's balance sheet date, Chocolate should Multiple choice question. A. accrue interest expense of $6,000. B. accrue interest expense of $1,000. C. accrue interest expense of $2,000
A
On October 1, 20X1, Duner Company purchases $100,000, 8% interest newly issued bonds at face amount. Interest is payable on March 30 and Sept. 30. On 12/31/X1, the company's balance sheet date, Duner should Multiple choice question. A. accrue interest revenue of $2,000. B. accrue interest revenue of $4,000. C. not accrue any interest revenue. D. accrue interest revenue of $8,000.
A
On October 1, 20X1, Snorkel Company issues $4 million, 8% interest bonds at face amount. Interest is payable on March 30 and Sept. 30. On 12/31/X1, the company's balance sheet date, Snorkel should Multiple choice question. A. accrue interest expense of $80,000. B. accrue interest expense of $160,000. C. accrue interest expense of $320,000. D. not accrue any interest expense.
A C D
On October 1, 20X1, Snorkel Company issues $4 million, 8% interest bonds at face amount. Interest is payable on March 30 and Sept. 30. On March 30, 20X2, Snorkel should (Select all that apply.) Multiple select question. A. debit interest payable $80,000 B. not record any interest expense. C. debit interest expense $80,000. D. credit cash $160,000 E. credit interest payable $160,000
A
On September 30th, year 1, Wald Corporation issues 20-year bonds that pay interest semi-annually on June 30 and December 31. The interest accrued between June 30, year 1 and September 30, year 1 will be Multiple choice question. A. accrued and added to the bond issue price B. deducted from the bond issue price C. ignored
B
Otto Company purchases $200,000 face amount, 8% semi-annual 10-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is Multiple choice question. A. 10 periods. B. 20 periods. C. 5 periods.
A
Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct? Multiple choice question. A. Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000. B. Debit investment in bonds for $80,000; credit cash for $80,000. C. Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000.
D
Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the Multiple choice question. A. coupon rate B. stated interest rate C. current rate of return D. effective interest rate
A
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt Multiple choice question. A. outstanding during the interest period. B. referred to as the face amount. C. that has to be repaid at maturity. D. referred to as the par value.
A C
Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.) Multiple select question. A. face amount B. market rate C. stated rate D. carrying value
B C
Periodic payments on installment notes typically include Multiple select question. A. installment fees. B. a portion that reflects interest at the effective interest rate. C. a portion that reduces the outstanding loan balance. D. a portion that reflects interest at the stated interest rate.
A
Peter Company issues 10-year bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue? Multiple choice question. A. Peter should recognize 3 months of interest. B. Peter should not recognize any interest until April 1, 20X2. C. Peter should recognize 6 months of interest.
A
Private placements of bonds typically incur lower bond issue costs because they are not subject to Multiple choice question. A. SEC registration. B. financial reporting. C. any regulation.
B
Private placements of bonds typically incur lower bond issue costs because they are not subject to Multiple choice question. A. financial reporting. B. SEC registration. C. any regulation.
C
Proverbial Corp. signed a 6-year note relating to the purchase of a new delivery fleet; annual payments are due at the end of the year. Proverbial's effective interest rate is 8%. At the time of purchase, the company recorded the fleet at $200,000. At the end of the first year, the net book value has decreased to $160,000, while the carrying value of the note is $164,000. Interest expense relating to the second year should be Multiple choice question. A. $12,800. B. $16,000. C. $13,120.
A C D
Question Mode Multiple Select Question Select all that apply Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.) Multiple select question. A. To use a medium of exchange in mergers and acquisitions. B. To provide investors with a means for diversifying investment risk. C. To enable smaller or debt-heavy companies to gain access to the bond market. D. To sell the bonds at a higher price.
Effective Interest
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period is referred to as the ____________ __________ rate
A
Schulz Company borrows cash from a bank and signs a promissory note. The bank should record Multiple choice question. A. notes receivable B. accounts payable C. accounts receivable D. notes payable
B
Sinking fund debentures typically require that the company redeem bonds Multiple choice question. A. after a sinking fund has been established B. on a pre-specified year-to-year basis C. at the end of the bond period
A
Small Company purchases new machinery by signing a $100,000 face amount 2-year note. The market interest rate is 8%, but no interest is due over the life of the note. Small should recognize a net note payable of Multiple choice question. A. $85,734. B. $100,000. C. $108,000
B
Smith Company purchases new machinery by signing an $80,000 face amount, 2-year note. The market interest rate is 6%, but no interest payment is due during the life of the note. Smith should record the machinery at Multiple choice question. A. $84,800 B. $71,200. C. $80,000.
Present
The issue price of bonds is calculated as the _________ value of all the cash flows required of the bonds.
B
Which of the following correctly describes a bond indenture? Multiple choice question. A. The portfolio of bonds that are issued during a particular fiscal period. B. A document detailing the promises made by the bond issuer. C. The relationship between the effective interest and the stated interest rates.
True
True or False: The interest expense on an installment note decreases with each periodic payment.
True
True or False: The outstanding balance (book value) of zero-coupon bonds increases by the periodic amount of interest recognized.
True
True or false: Supplemental disclosures should provide investors and creditors information about the risk associated with companies' financial obligations.
True
True or false: The interest rate stated in a note is typically equal to the market rate.
C
Using the effective interest method, the bond issuer calculates interest expense based on the: Multiple choice question. A. face amount of the bonds B. expected future value of the bonds C. outstanding balance of the bonds
A
Waldo Inc. purchases equipment and signs a note in exchange. The note specifies an interest rate of 8%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 6%. On the day the note is signed, the note should be recognized at the Multiple choice question. A. present value of the cash payments using a 6% interest rate. B. present value of the cash payments using a 8% interest rate. C. the sum of the cash paid over the life of the note.
B
Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. Consistent with IFRS, on the date of issuance Wasser should Multiple choice question. A. credit premium on bonds payable for $10,000. B. credit equity-conversion option for $10,000. C. not recognize any premium or additional equity.
C
Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. Consistent with IFRS, on the date of issuance Wasser should Multiple choice question. A. not recognize any premium or additional equity. B. credit premium on bonds payable for $10,000. C. credit equity-conversion option for $10,000.
C D
What are the advantages of financing with long-term debt? (Select all that apply.) Multiple select question. A. It decreases the current ratio. B. It is less risky than financing with equity. C. A company may earn a greater return than the cost of borrowing the funds. D. Interest is tax deductible.
C
What is the primary reason why the issue price of a bond differs from the cash flows associated with the bond subsequent to its issuance? Multiple choice question. A. The difference represents a discount. B. The difference represents a premium. C. The difference represents the time value of money.
A B C E
What type of information must be disclosed related to debt? (Select all that apply.) Multiple select question. A. Aggregate amount payable for next five years B. Nature of the liability C. Interest rates D. The names of each debt holder E. Call and conversion options
A
When a promissory note matures and is paid, the borrower should _____ and the lender should _____. Multiple choice question. A. debit notes payable; credit notes receivable B. credit notes receivable; debit notes payable C. credit notes payable; debit notes receivable D. debit notes receivable; credit notes payable
A
When a promissory note matures and is paid, the borrower should _____ and the lender should _____. Multiple choice question. A. debit notes payable; credit notes receivable B. debit notes receivable; credit notes payable C. credit notes receivable; debit notes payable D. credit notes payable; debit notes receivable
C
When an accounting period ends between interest dates, interest should be Multiple choice question. A. ignored until the next interest payment date B. prepaid C. accrued since the last interest date
Underwriter
When issuing bonds, corporations usually sell an entire issue to an ________ rather than selling bonds directly to the public.
B C
Which of the following are cash flows typically associated with already issued bonds? (Select all that apply.) Multiple select question. A. amortization of gains and losses B. the face amount at maturity C. periodic interest payments
B C
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) Multiple select question. A. Factoring bonds through a licensed factor. B. Purchasing bonds on an open market. C. Including a call feature when the bonds are issued.
B C D
Which of the following are terms that can be used to refer to the periodic interest rate paid by bond issuers? (Select all that apply.) Multiple select question. A. effective rate B. nominal rate C. coupon rate D. stated rate E. market rate
B C
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) Multiple select question. A. The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock. B. The warrants can be sold by the bondholder to another investor. C. The warrants can be exercised separately from the bonds.
B C
Which of the following are true regarding zero-coupon bonds? (Select all that apply.) Multiple select question. A. Zero-coupon bonds are interest free. B. Zero-coupon bonds issue at deep discounts. C. Zero-coupon bonds do not pay interest.
B C
Which of the following aspects of financial reporting should decision makers consider to minimize their risk? (Select all that apply.) Multiple select question. A. Only financial statement items are relevant to the decision maker. B. The chance of recurrence of gains and losses. C. The existence of "off-balance-sheet" financing arrangements.
A
Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue? Multiple choice question. A. creditworthiness of the issuer B. reputation of the trustee who holds the indenture C. frequency of scheduled interest payments
C
Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue? Multiple choice question. A. frequency of scheduled interest payments B. reputation of the trustee who holds the indenture C. creditworthiness of the issuer
A
Which of the following is an advantage of issuing bonds? Multiple choice question. A. The total loan is broken into many parts, making it easier to find lenders. B. The interest rate on bonds is always lower than the rate on bank loans. C. The fees associated with obtaining the funds are typically lower than for other large loans.
B
Which of the following is correct regarding the default of a bond issuer? Multiple choice question. A. A class action suit must be filed by the trustees as well as the individual bondholders. B. The trustee holding the indenture can sue the issuer on behalf of the bondholders. C. Each bondholder must sue the issuing company for payment.
A
Which of the following is correct regarding the effective interest method? Multiple choice question. A. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. B. Interest paid is equal to the effective interest rate multiplied by the maturity value. C. Interest recorded is equal to the effective interest rate multiplied by the issue price.
B
Which of the following is true regarding a debenture bond? Multiple choice question. A. It is secured by an outside third party. B. It is secured by the faith and credit of the issuer. C. It is secured by the issuer's long-term assets.
A B C
Which of the following represent the typical characteristics of liabilities? (Select all that apply.) Multiple select question. A. Future cash payments are certain or estimable. B. The requirement of future cash payments. C. Interest accrues as time passes on long-term liabilities. D. Future cash payments cannot be measured.
B D
Which of the following represents a correct statement regarding zero-coupon bonds? (Select all that apply.) Multiple select question. A. Zero-coupon bonds are very popular and make up a large proportion of corporate debt. B. Zero-coupon bonds represent only a small portion of the bond market. C. Zero-coupon bonds have monthly interest payments similar to traditional bonds. D. The typical investors enjoy a tax-exempt or tax-deferred status.
A B
Which of the following statements are correct regarding bond yields? (Select all that apply.) Multiple select question. A. Bond issues are priced to yield the market rate. B. Supply and demand influence bond yields. C. All bonds issued at a given point of time will yield the same return.
B
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? Multiple choice question. A. They are paid at the same time that other specific debt is satisfied. B. They receive payment only after other specific debt has been satisfied. C. They receive payment after secured debt has been satisfied.
C
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy? Multiple choice question. A. They receive payment after secured debt has been satisfied. B. They are paid at the same time that other specific debt is satisfied. C. They receive payment only after other specific debt has been satisfied.
A
Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums? Multiple choice question. A. The method can only be used if it produces results that are not materially different from those produced by the effective interest method. B. The method is not permitted under current U.S. GAAP. C. The method can be used if a company irrevocably elects the method on the bond issue date.
B
Which of the following statements is correct? Multiple choice question. A. Bonds sell for their face amount if they are issued near the original interest date. B. Bonds may sell below, above, or at their face amount. C. Bonds always sell for their face amount.
C D
Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply.) Multiple select question. A. It indicates the likelihood the loan will be paid back at maturity. B. It indicates the leverage of the company. C. It indicates the company's margin of safety in terms of paying its fixed interest. D. It indicates the company's ability to pay its cost of borrowing.
A
Which ratio indicates profitability without regard to how resources are financed? Multiple choice question. A. Rate of return on assets B. Profit margin C. Gross profit D. Debt to equity ratio
Registered
____________ bonds are popular in the present day, but bearer bonds were popular years ago
