Chapter 14, Ch. 14 StudyBook, ACTG SB CH14
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:
$2,575,000
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, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should recognize this conversion by crediting common stock for
$2,575,000
Evergreen Corp. issues 10,000, $1,000 face amount bonds. Each bond can be converted into 20 shares of common stock. At the bond issue date, the company's common shares trade for $55 per share. At the date of issue, Evergreen should recognize an addition to equity of:
$1,000,000.
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:
$1,000,000.
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:
$1,470
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
$1.4 million
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:
$1.4 million
Walker Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The market value of the bonds is $10.2 million. If the company chose the fair value option, the bonds should be reported at:
$10,200,000.
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).
$115,589
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).
$115,589 Reason: (100,000 * 0.61027) + (3,500 * 15.58916)
On April 1, Magenta Company sells $500,000 face amount, 10% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is 9%. When the bonds are issued, how much interest will be included in the issue price?
$12,500
On April 1, Magenta Company sells $500,000 face amount, 10% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is 9%. When the bonds are issued, how much interest will be included in the issue price?
$12,500 Reason: The price includes accrued interest of 500,000 * 10% * (3/12)
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).
$191,684
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
$2,575,000
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, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should recognize this conversion by crediting common stock for:
$2,575,000
Jackie Company's new bond issue with face amount of $6 million sells for $6.4 million. Which of the following facts may explain why the bonds sell at a premium?
The company's stated interest rate must be higher than that of other competing companies.
Which of the following statements is correct regarding using the straight-line method of amortizing bond discounts or premiums?
The method can only be used if it produces results that are not materially different from those produced by the effective interest method.
Which of the following is correct regarding the default of a bond issuer?
The trustee holding the indenture can sue the issuer on behalf of the bondholders
Which of the following is correct regarding the default of a bond issuer?
The trustee holding the indenture can sue the issuer on behalf of the bondholders.
Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond?
The value of the conversion feature is not recognized separately.
Which of the following is correct regarding the recognition of the value of a conversion feature associated with a convertible bond consistent with IFRS?
The value of the conversion feature is recognized as equity.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.)
The warrants can be exercised separately from the bonds. The warrants can be sold by the bondholder to another investor.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.)
The warrants can be exercised separately from the bonds. The warrants can be sold by the bondholder to another investor.
Which of the following represents an important difference between bonds with detachable warrants and convertible bonds?
The warrants can be separated from the bonds.
Which of the following statements is correct regarding the cost associated with issuing privately placed corporate bonds?
They are less costly to issue than publicly offered bonds.
Which of the following are correct regarding bonds? (Select all that apply.)
They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds at a specific date.
Which of the following are correct regarding bonds? (Select all that apply.)
They obligate the issuing company to repay the bonds at a specific date. They obligate the issuing company to pay a specific amount.
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy?
They receive payment only after other specific debt has been satisfied
Which of the following statements is correct regarding payment priority to holders of subordinated debentures in the case of a bankruptcy?
They receive payment only after other specific debt has been satisfied.
Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.)
To enable smaller or debt-heavy companies to gain access to the bond market . To use a medium of exchange in mergers and acquisitions. To sell the bonds at a higher price.
Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.)
To use a medium of exchange in mergers and acquisitions. To enable smaller or debt-heavy companies to gain access to the bond market. To sell the bonds at a higher price.
True or false: The implied interest rate may be different from the stated interest rate of a loan.
True
True or false: The interest rate stated in a note is typically equal to the market rate.
True
Which of the following are true regarding zero-coupon bonds? (Select all that apply.)
Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.
Which of the following are true regarding zero-coupon bonds? (Select all that apply.)
Zero-coupon bonds do not pay interest. Zero-coupon bonds issue at deep discounts.
A new bond issue that offers an 8% stated interest rate, while bonds of similar risk return 10%, will sell at:
a discount
Periodic payments on installment notes typically include:
a portion that reflects interest at the effective interest rate. a portion that reduces the outstanding loan balance.
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
$200,000
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 place with one investor. On the date of issue, the investor should recognize an investment in bonds payable of
$200,000
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
$200,000.
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:
$200,000.
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:
$200,000.
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).
$217,966
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:
$24,658
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?
$298,904
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)
$3,354.
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of
$354.
On January 2, 20X1, Schneider Company issues $100,000 of 6% bonds. The market interest rate is 7%. Interest of $3,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The bond issues for $95,842. On June 30, the company should recognize a discount amortization of:
$354.
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:
accrue interest expense of $80,000.
When an accounting period ends between interest dates, interest should be
accrued since the last interest date
When an accounting period ends between interest dates, interest should be:
accrued since the last interest date
The difference between the effective interest and the interest paid represents:
amortization of a discount or premium.
Which of the following are valid valuation methods for reporting bonds payable? (Select all that apply.)
amortized cost current fair value on each reporting date
Grunwald elected to report it bonds at fair value. During the current year the fair value of the bonds increased due to changes in the related credit risk. Grunwald should report the gain:
as part of OCI
On July 1, 20X1, Klein Company issued $200,000 face amount bonds for $195,000. The effect interest rate is 8%. The bonds pay semi-annual interest pf 7% on January 1 and July 1. On December 31, 20X1, the company should credit
bond discount for $800 Reason: (195,000 * 0.04) - (200,000 * 0.035)
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
bond discount for $800.
On January 2, 20X1, Schneider Company issues $100,000 of 7% bonds. Interest of $3,500 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 8%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).
$95,944
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.) = Purchasing bonds on an open market. = Factoring bonds through a licensed factor. = Including a call feature when the bonds are issued.
- Purchasing bonds on an open market. - Including a call feature when the bonds are issued.
Which of the following represent the typical characteristics of liabilities? (Select all that apply). = Future cash payments cannot be measured. = The requirement of future cash payments. = Future cash payments are certain or estimable. = Interest accrues as time passes on long-term liabilities.
- The requirement of future cash payments. - Future cash payments are certain or estimable. - Interest accrues as time passes on long-term liabilities.
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ___ coupon bonds.
0
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as ___ coupon bonds. (Enter only one word.)
0
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:
bond discount for $800.
Callable bonds can be redeemed at the choice of the:
bond issuer.
The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is
1.32 Reason: (100+150)/(120+50+20)
The following selected information pertains to Wilson Company. Current liabilities: $100; long-term liabilities: $150; contributed capital: $120; retained earnings: $50; accumulated other comprehensive income: $20. The company's debt to equity ratio (rounded to two digits after the decimal point) is:
1.32.
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on assets percentage is:
12.5%.
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:
20 periods.
The following selected information pertains to Wilson Company. Total assets: $400; total liabilities: $220; operating income: $60; income from continuing operations: $55; net income: $50. The company's return on shareholders' equity expressed as a percentage is:
27.78%.
Emil Company purchases $400,000 face amount, 8% semi-annual 15-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is:
30 periods
The following selected information pertains to Wilson Company. Net income: $50; taxes: $20; interest: $10. The company's times interest earned ratio is:
8.
Which of the following correctly describes a bond indenture?
A document detailing the promises made by the bond issuer.
Which of the following best describes the essence of the concept "substance over form"?
Accounting for a transaction is primarily determined by the essence of the transaction.
Which of the following statements regarding convertible bonds subsequent to issuance is correct?
Accounting is the same as for nonconvertible bonds.
Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.)
Appointed by bond issuer Holds the bond indenture Represents the rights of the bond holders
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?
Reduce the cash proceeds and increase the discount and debt issue costs account
Which of the following describe the role of a trustee with respect to corporate bonds? (Select all that apply.)
Represents the rights of the bond holders Holds the bond indenture Appointed by bond issuer
Private placements of bonds typically incur lower bond issue costs because they are not subject to:
SEC registration.
The phrase used to indicate that accounting and reporting should reflect the underlying economic essence of a transaction ___ is over ___. (Enter one word per blank.)
Substance, form
A conversion feature is "beneficial" if the stock into which the bond can be converted:
exceeds the face amount of the bond.
At the time of maturity, the repayment amount for bonds is equal to the:
face amount of the bonds
The amount of interest paid on bonds is calculated by multiplying ______ of the bonds with the ____ rate.
face amount; stated
Glen Inc. elected to report its bonds at fair value. If the unadjusted carrying value of the bonds is $500,000 and the fair value rises to $515,000, Glen should credit ________:
fair value adjustment for $15,000
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:
higher than 8%.
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.
implicit
Emil Company has $4 million in bonds outstanding. During the current year, the applicable market interest rate decreases. The fair value of Emil Company's bonds likely will:
increase
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:
increase by $354.
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, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit (Select all that apply.)
bonds payable for $2,500,000. premium on bonds payable for $75,000.
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:
credit equity-conversion option for $10,000.
Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should
credit premium on bonds payable for $10,000.
Wasser Company issues $500,000, 8% convertible bonds for $510,000. Without the conversion feature, the bonds would issue at par. On the date of issuance, Wasser should:
credit premium on bonds payable for $10,000.
The risk that bond investors will not receive interest and principal payments when they are due is referred to as:
credit risk
For the current interest period, Jones Corporation's accountant correctly recognized interest expense of $7,350 relating to Jones' bonds and paid $7,000 in interest to bond holders. The journal entry recording the interest also must have included a:
credit to discount on bonds payable
Which of the following is a critical factor in determining the effective market interest rate for a particular bond issue?
creditworthiness of the issuer
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n)
debenture bond
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a(n):
debenture bond
Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the
debt to equity ratio.
Dividing total liabilities by total stockholders' equity will result in a ratio referred to as the:
debt to equity ratio.
A bond that sells for less than its face amount is sold at a
discount
A bond that sells for less than its face amount is sold at a ___.
discount
A bond that sells for less than its face amount is sold at a:
discount
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 __________ __________method. (Enter only one word per blank.)
effective interest
Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the:
effective interest rate
The creditworthiness of the company issuing the bonds will affect the company's:
effective interest rate
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of the debt during the interest period referred to as the ___ ___ method.
effective; interest
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:
increase by $709.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. As a result of recognizing this transaction, the bond carrying value will:
increase by $709.
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:
mislead investors.
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds.
mortgage
A(n) ____ bond is backed by a lien on specified real estate owned by the issuer. (Enter only one word.)
mortgage or secured
For bonds reported under the fair value option, changes in fair value due to interest rate changes are reported in:
net income.
For bonds reported under the fair value option, unrealized gains or losses due to fair value changes attributable to changing interest rates are reported as part of:
net income.
Accounting for convertible bonds subsequent to issuance is the same as accounting for _____.
non-convertible bonds
Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit
notes payable
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, Smite Corp. should credit:
notes payable for $300,000.
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:
notes payable for $500,000.
Schulz Company borrows cash from a bank and signs a promissory note. The bank should record
notes receivable
Schulz Company borrows cash from a bank and signs a promissory note. The bank should record:
notes receivable
In the statement of cash flows, interest paid on long term notes should be reported as outflows from a(n)
operating activity
Gertrude Company receives $15,200 relating to its installment note receivable; of this amount $9,000 represents interest. In its statement of cash flows, this inflow should be reported as a(n):
operating activity inflow of $9,000. investing activity inflow of $6,200.
Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In Kordel's statement of cash flows, this payment should be reported as (Select all that apply.)
operating activity outflow of $9,000. financing activity outflow of $6,200.
In the statement of cash flows, interest received on long-term notes receivable should be reported as inflows from a(n):
operating activity.
If a company elects the fair value option for its bonds, related gains and losses that arise from changes to credit risk are reported as:
other comprehensive income
Using the effective interest method, the bond issuer calculates interest expense based on the:
outstanding balance of the bonds
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt:
outstanding during the interest period.
A bond investor who applies the effective interest method calculates interest revenue based on the _____ balance of the bonds times the _____ interest rate.
outstanding; effective
Zero-coupon bonds typically issue at a deep discount because they
pay no interest
Zero-coupon bonds typically issue at a deep discount because they:
pay no interest
Installment notes typically involve the purchase of assets and (Select all that apply.)
periodic payments include principal and interest. require installment payments over time.
If bonds sell between interest periods, the amount received by the bond issuer includes the bonds selling price
plus accrued interest.
A bond that sells for more than its face amount is sold at a ___.
premium
A bond that sells for more than its face amount is sold at a.
premium
A bond that sells for more than its face amount is sold at a:
premium
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, 25% of the bondholders convert their bonds. The balance in the premium on bonds payable account is $300,000. Nattel should debit (Select all that apply.)
premium on bonds payable for $75,000. bonds payable for $2,500,000.
The issue price of bonds is calculated as the _____ value of all the cash flows required of the bonds.
present
Generally, liabilities are valued at their
present value
The issue price of a bond is always equal to the
present value of future cash flows
Amortization of bond discounts results in the bond being valued on the balance sheet at the:
present value of the associated future cash flows.
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:
present value of the bonds' cash flows using the market interest rate
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:
present value of the cash payments using a 6% interest rate.
Gruenwald Corp. purchases a new computer system and signs a note in exchange. The note specifies an interest rate of 12%. Based on the riskiness and other factors associated with this loan, the market rate is approximately 7%. On the day the note is signed, the note should be recognized at the:
present value of the cash payments using a 7% interest rate.
Three years ago, Harper Company issued 10-year bonds at a discount. The company utilizes the effective interest method to recognize periodic interest. After 3 years, the carrying value of the bonds is equal to the:
present value of the future cash flows using original rates.
The issue price of a bond is always equal to the:
present value of the future cash flows.
If bonds are not traded on an open-market exchange, their fair value can be estimated as the:
present value of the remaining future cash flows discounted at the current interest rate.
Generally, liabilities are valued at their:
present value.
If a company sells its entire bond issue to a a single investor, the sale is referred to as a:
private placement.
A company that recognizes a long-term notes payable has signed the legal document referred to as a ___ note.
promissory
The primary purpose of the call feature associated with bonds is to
protect the issuer against declining interest rates.
Bond issue costs
reduce the cash proceeds from the issuance of debt. increase the effective interest rate of borrowing.
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to
repay a certain amount at a specific date
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to
repay a certain amount at a specific date.
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to:
repay a certain amount at a specific date.
If a company elects to report bonds under the fair value option, changes in fair value result in:
reported gain or loss
An early extinguishment of debt refers to long-term liability such as bonds that are
retired prior to maturity
An early extinguishment of debt refers to long-term liability such as bonds that are:
retired prior to maturity
Bonds that retire in installments during all or part of the life of the bond issue are called ___ bonds.
serial
Bonds that retire in installments during all or part of the life of the bond issue are called ____ bonds.
serial
Bonds that systematically mature over a succession of years are referred to as:
serial bonds
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 ____.
stated interest rate; market interest rate
Periodic interest payments associated with corporate bonds are calculated using this information: (Select all that apply.)
stated rate face amount
Convertible bonds are retired when bondholders choose to convert them into shares of:
stock
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
subordinate
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:
subordinate
Bond holders who are not entitled to receive any liquidation payments until claims of:
subordinate
When we multiply the face amount of bonds with the stated interest rate, we calculate
the amount of interest paid
When we multiply the face amount of bonds with the stated interest rate, we calculate:
the amount of interest paid
Which of the following are cash flows typically associated with already issued bonds? (Select all that apply.)
the face amount at maturity periodic interest payments
Glen Inc. elected to report its bonds at fair value. If the unadjusted carrying value of the bonds is $500,000 and the fair value rises to $515,000 due to the credit risk associated with the bonds, Glen should debit ________:
unrealized holding loss - OCI for $15,000
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:
value of the asset or service exchanged
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
value of the purchased equipment.
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:
value of the purchased equipment.
Bonds that pay no interest and instead issue at a deep discount are commonly referred to as __________ coupon bonds.
zero
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:
$400
At the beginning of the current year, Wagner Company purchases equipment and signs an installment note requiring 6 annual equal payments at the end of each year. The equipment would sell for $200,000 if the company paid cash. The company's effective borrowing rate is 7%. Wagner must make annual installment payments of (use the tables in your textbook and round to the nearest dollar)
$41,959.
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:
$5 million
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:
$500,000.
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are sold, Early will receive cash in amount of
$520,000.
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. Th effective rate for this company is also 12%. When the bonds are sold, Early will receive cash in amount of
$520,000. Reason: These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. (500,000 * 12% * (4/12)) + 500,000
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)
$6,709.
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?
$675,560
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
$709.
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:
$709.
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:
$71,200.
On April 1, Munchin Company sells $800,000 face amount, 6% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 6%. When the bonds are sold, Munchin should receive:
$812,000
On April 1, Munchin Company sells $800,000 face amount, 6% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 6%. When the bonds are sold, Munchin should receive:
$812,000 Reason: These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. $800,000 + ($800,000 * 0.06 * (3/12))
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:
$85,734.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) = The warrants can be exercised separately from the bonds. = The warrants require that, upon exercise of the warrants, the bonds are exchanged for stock.' = The warrants can be sold by the bondholder to another investor.
- The warrants can be exercised separately from the bonds. - The warrants can be sold by the bondholder to another investor.
Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) = The warrants require that, upon exercise of the warrants, the bonds are exchanged for the stock. = The warrants can be exercised separately from the bonds. = The warrants can be sold by the bondholder to another investor.
- The warrants can be exercised separately from the bonds. - The warrants can be sold by the bondholder to another investor.
Which of the following are correct regarding bonds? (Select all that apply.) = They obligate the issuing company to repay the bonds at a specific date. = They obligate the issuing company to repay the bonds when interest rates increase. = They obligate the issuing company to pay an estimated amount. = They obligate the issuing company to repay the bonds when market interest rates decrease. = They obligate the issuing company to pay a specific amount.
- They obligate the issuing company to repay the bonds at a specific date. - They obligate the issuing company to pay a specific amount.
Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.) = To sell the bonds at a higher price. = To enable smaller or debt-heavy companies to gain access to the bond market. = To provide investors with a means for diversifying investment risk. = To use a medium of exchange in mergers and acquisitions.
- To sell the bonds at a higher price. - To enable smaller or debt-heavy companies to gain access to the bond market. - To use a medium of exchange in mergers and acquisitions.
Which of the following are true regarding zero-coupon bonds? (Select all that apply.) = Zero-coupon bonds do not pay interest. = Zero-coupon bonds issue at deep discounts. = Zero-coupon bonds are interest free.
- Zero-coupon bonds do not pay interest. - Zero-coupon bonds issue at deep discounts.
Periodic payments on installment notes typically include = a portion that reflects interest at the stated interest rate. = a portion that reflects interest at the effective interest rate. = installment fees. = a portion that reduces the outstanding loan balance.
- a portion that reflects interest at the effective interest rate. - a portion that reduces the outstanding loan balance.
Which of the following purchases frequently involve installment notes payable? (Select all that apply.) = automobiles = utilities = buildings = supplies = land
- automobiles - buildings - land
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are issued, Early will credit (Select all that apply.) = bonds payable for $520,000. = premium on bonds payable for $20,000. = bonds payable for $500,000. = interest payable for $20,000.
- bonds payable for $500,000. - interest payable for $20,000.
Kordel Company pays $15,200 relating to its installment note payable; of this amount $9,000 represents interest. In Kordel's statement of cash flows, this payment should be reported as (Select all that apply.) = financing activity outflow of $15,200. = financing activity outflow of $6,200. = operating activity outflow of $9,000. = operating activity outflow of $15,200.
- financing activity outflow of $6,200. - operating activity outflow of $9,000.
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are issued, Early will credit (Select all that apply.) = bonds payable for $520,000. = premium on bonds payable for $20,000. = interest payable for $20,000. = bonds payable for $500,000.
- interest payable for $20,000. - bonds payable for $500,000.
Installment notes typically involve the purchase of assets and (Select all that apply.) = periodic payments include principal and interest. = require installment payments over time. = require periodic payments of interest and payment of the loan at maturity. = defer interest payments until maturity.
- periodic payments include principal and interest. - require installment payments over time.
Bond issue costs = do not affect the cash proceeds from the issuance of debt. = reduce the cash proceeds from the issuance of debt. = decrease the effective interest rate of borrowing. = increase the cash proceeds from the issuance of debt. = increase the effective interest rate of borrowing.
- reduce the cash proceeds from the issuance of debt. - increase the effective interest rate of borrowing.
Which of the following statements is correct?
Bonds may sell below, above, or at their face amount.
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?
Company C
Mergenthal Company issues bonds with a face amount of $800,000 for $749,000. Which of the following journal entries would be correct?
Debit cash for $749,000; debit discount on bonds payable for $51,000; credit bonds payable for $800,000.
Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct?
Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.
For bonds issued with detachable stock warrants, the issue price is:
Debt and equity
This ratio may provide information about a company's default risk.
Debt to equity
The debt equity ratio can provide information regarding a company's risk that it will be unable to pay its debt when due. This is called the company's ___ risk.
Default
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 method. (Enter only one word per blank.)
Effective interest
True or false: If a company elects the fair value option, it must report all of its financial instruments at fair value.
False
As a result of applying the effective interest method, the carrying value of bonds is equal to the present value of the cash flows. (Enter only one word.)
Future
Which of the following represent the typical characteristics of liabilities? (Select all that apply.)
Future cash payments are certain or estimable. The requirement of future cash payments. Interest accrues as time passes on long-term liabilities.
Which of the following represent the typical characteristics of liabilities? (Select all that apply.)
Future cash payments are certain or estimable. Interest accrues as time passes on long-term liabilities. The requirement of future cash payments.
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?
Hatter Company's stated interest rate must be lower than that of competing companies in the bond market.
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.)
Including a call feature when the bonds are issued. Purchasing bonds on an open market.
Which of the following are common strategies for debtors to retire bonds prior to the maturity date? (Select all that apply.)
Including a call feature when the bonds are issued. Purchasing bonds on an open market.
The following highlights differences between loans with the principal due at maturity and installment loans. Correctly match each characteristic with the type of loan it applies to. Instructions:
Installment loan = Periodic payment includes interest and a portion that reduces the outstanding loan. Loan with lump-sum principal payment at maturity = Periodic payment does not include a portion of principal.
The following highlights differences between loans with the principal due at maturity and installment loans. Correctly match each characteristic with the type of loan it applies to.
Installment loan = The loan balance is reduced over time and reaches zero at the end of the loan term. Loan with lump sum principal payment at maturity = The loan balance reflects the face amount at the date of maturity.
Which of the following is correct regarding the effective interest method?
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.
Which of the following statements regarding the fair value option is correct?
It can be applied on an "instrument-by-instrument" basis.
Which of the following is correct regarding the return on assets?
It indicates profitability without regard to how resources are financed.
Which of the following statements regarding the times interest earned ratio is correct? (Select all that apply.)
It indicates the company's ability to pay its cost of borrowing. It indicates the company's margin of safety in terms of paying its fixed interest.
Which of the following is correct regarding the rate of return on shareholders' equity?
It indicates the effectiveness of employing resources provided by owners.
Which of the following statements regarding the times interest earned ratio is correct?
It indicates the margin of safety provided to creditors.
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?
It is impractical for the issuer to enter into an agreement with each bondholder.
Which of the following is true regarding a debenture bond?
It is secured by the faith and credit of the issuer.
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.
Market rate
The return on assets is calculated by dividing ___ by total assets. (Enter only one word per blank.)
Net income
The times interest earned ratio is calculated as:
Net income plus interest plus taxes divided by interest
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.
Periodic interest is incurred
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?
Peter should recognize 3 months of interest.
Peter Company issues 10-years bonds on October 1, 20X1. The bonds pay 6% interest semi-annually. Peter Company has a calendar year-end. Which of the following statements is correct regarding interest recognized in its 12/31/X1 income statement relating to this bond issue?
Peter should recognize 3 months of interest.
Which ratio indicates profitability without regard to how resources are financed?
Rate of return on assets
This ratio provides information about a company's effectiveness of employing resources provided by owners.
Rate of return on shareholders' equity
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?
Reduce the cash proceeds and increase the discount and debt issue costs account
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.)
bonds payable for $5 million. loss on bond conversion for $1,100,000. premium on bonds payable for $150,000.
The most common type of corporate debt is:
bonds.
One of the advantages associated with bonds is that a relatively large amount of debt can be:
broken into small portions.
Which of the following purchases frequently involve installment notes payable? (Select all that apply.)
buildings land automobiles
Margot, an accounting student, tries to determine whether a bond sells at a premium, discount, or face amount. Margot can determine whether the bond sells at a premium, discount, or face amount:
by comparing the effective and stated interest rates.
Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as ____ bonds.
callable
Walker Corp. issues $10 million in bonds at a discount. One year later, the unamortized discount associated with the bonds is $325,000. The company chose the fair value option; however, because of private placement, the fair value is not readily observable. As an alternative, the company:
can report the bonds at the present value of the remaining cash flows using the current effective rate.
Which of the following is a common factor that affects the fair value of a company's bonds?
changes in current market rates
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:
common stock for $6,250,000.
A bond feature that aims at making the bonds more attractive to investors is the ____ feature.
conversion
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ________ bonds.
conversion
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ___ bonds.
convertible
Bonds that permit bond holders to exchange their bonds for common stock are referred to as _____ bonds.
convertible
Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ___ bonds.
convertible or conversion
The risk that bondholders will not receive interest and principal payments when due is ___ risk.
credit
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 record what journal entry? (Select all that apply.)
credit cash $200,000 debit investment in bonds $200,000.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. The company should also
credit discount on bonds payable for $709.
On January 1, 20X1, Wormer 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 and sell for $191,684. On June 30, 20X1, the company recognizes interest expense of $6,709. The company should also:
credit discount on bonds payable for $709.
Bond issue costs:
increase the effective interest rate of borrowing. reduce the cash proceeds from the issuance of debt.
Jackson Company has $1 million bonds outstanding that were issued to yield 5%. During the year, the market interest rate decreases. The fair value of Jackson's bonds likely will:
increase.
The specific promises made to bondholders are described in a document called a bond ___.
indenture
The specific promises made to bondholders are described in a document called a bond _____. (Enter only one word.)
indenture
The specific promises made to bondholders are described in a document called a bond:
indenture
The specific promises made to bondholders are described in a document referred to as a bond:
indenture
The specific promises made to bondholders are described in a document referred to as a bond
indenture.
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:
interest expense for $12,000.
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:
interest expense of $10,000.
On May 1, Early Company sells $500,000 face amount, 12% bonds. The bonds pay interest semi-annually on June 30 and December 31. The effective rate for this company is also 12%. When the bonds are issued, Early will credit (Select all that apply.)
interest payable for $20,000. bonds payable for $500,000.
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, First Rate Bank should credit:
interest revenue for $12,000.
The fundamental reason why companies issue convertible bonds is to
make the bonds more attractive to investors.
The fundamental reason why companies issue convertible bonds is to:
make the bonds more attractive to investors.
The interest rate on notes payable typically is equal to the ___ rate.
market
The interest rate on notes payable typically is equal to the ____ rate.
market
Changes in the current ______ often represent a major contributor to changes in the fair value of bonds.
market interest rate
A common reason for redeeming a bond prior to its maturity date is that:
market interest rates decreased.
Bonds that do not include a call provision
may be repurchased on the open market
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
mislead investors
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
mislead investors.
