Chapter 14-Intermediate accounting
Sinking fund debentures typically require that the company redeem bonds
on a pre-specified year -to-year basis
The periodic interest paid by the issuer of a bond is referred to as the
stated rate
What is a critical factor in determining the effective interest rate for a particular bond issue?
the creditworthiness of the issuer
Typical characteristics of liabilities?
-Interest accrues as time passes on long-term liabilities -The requirement of future cash payments -The future cash payments are certain or estimable
What terms can be used to refer to the periodic interest paid by bond issuers?
-Stated rate -Nominal rate -Coupon rate
What is correct regarding bond yields?
-Supply and demand influence bond yields -Bond issues are priced to yield the market rate.
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.
A challenge with debt instruments is that the financial community continually develops increasingly complex ways to write financial instruments to satisfy the evolving tastes of both debtors and creditors.
What correctly describes a bond indenture?
A document detailing the promises made by the bond issuer
A ______ bond is backed by a lien on specified real estate owned by the issuer.
A mortgage bond is backed by a lien on specified real estate owned by the issuer
If the stated rate is more than its market rate the bond is
Attractive and a premium
Gregory Company issued $5 million face amount bonds. The bond indenture is held by a large national bank. Why would a bank be holding the indenture?
Because it would be impractical for the issuer to enter into an agreement with each bondholder.
Callable bonds can be redeemed at the choice of the
Bond issuer
Bonds requiring pre-specified, year-by-year redemptions are called _____ ______ debentures
Bonds requiring pre-specified, year-by-year redemptions are called sinking fund debentures
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as ____ bonds
Bonds that are backed by a lien on specific real estate owned by the issuer are referred to as mortgage bonds
Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as ____ bonds
Bonds that can be bought back by the issuer at a specified price prior to the bonds' maturity date are referred to as callable bonds.
Bonds that permit bond holders to exchange their bonds for common stock are referred to as ____ bonds.
Bonds that permit bond holders to exchange their bonds for common stock are referred to as convertible bonds
The creditworthiness of the company issuing the bonds will effect the company's
Effective interest rate
At the time of maturity, the repayment amount for bonds is equal to the:
Face amount of the bonds
What is true regarding a debenture bond?
It is secured by the faith and credit of the issuer
What time frame are registered bonds popular?
Present day
The issue price of a bond is always equal to the
Present value of the future cash flows
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.
Recording interest each period as the effective rate of interest multiplied by the outstanding balance of debt during the interest period is referred to as the effective interest method.
Interest on bonds typically is paid
Semiannually
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
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?
The $1.2 million represents the time value of money
What is the primary reason why the issue price of a bond differs from the cash flows associated with the bond subsequent to its issuence?
The difference represents the time value of money
The issue price of bonds is calculated as the ______ value of all the cash flows required of the bonds.
The issue price of bonds is calculated as the present value of all the cash flows required of the bonds
The mirror image of a liability is an asset. The mirror image of investments in bonds is
The mirror image of a liability is an asset. The mirror image of investments in bonds is bonds payable
The specific promises made to bondholders are described in a document called a bond____.
The specific promises made to bondholders are described in a document called a bond indenture
Regarding payment priority to holders of subordinated debentures in the case of bankruptcy?
They receive payment only after other specific debt has been satisfied
Bonds may sell below, above, or at their face amount. T/F
True
When were bearer bonds (coupon bonds) popular?
Years ago
One of the advantages associated with bonds is that a relatively large amount of debt can be
broken into small portions
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
A bond that is secured only by the faith and credit of the issuing corporation is referred to as a
debenture bond
Periodic interest expense on liabilities is calculated by multiplying the amount of debt outstanding during the period by the
effective interest rate
The periodic interest paid by the issuer of a bond is referred to as the
effective rate
The mirror image of a liability is an asset. The mirror image of investments in bonds is _____ _____
he mirror image of a liability is an asset. The mirror image of investments in bonds is Bonds payable.
Periodic interest expense on liabilities is calculated by multiplying the effective interest rate by the amount of debt
outstanding during the interest period
Generally, liabilities are valued at their
present value
Amortization of bond discounts results in the bond being valued on the balance sheet at the
present value of the associated cash flows
The effective interest method applies the accrual concept by
recording interest expense periodically at the effective rate.
Today, most bonds issued are
registered bonds
Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to
repay a certain amount at a specific date
The type of financial instruments that are commonly issued in today's markets.
"Exotic" financial instruments continue to be developed and offered to investors
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
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 market rate
Bonds that retire in installments during all or part of the life of the bond issue are called _____ bonds
Bonds that retire in installments during all or part of the life of the bond are called serial bonds
What is correct regarding the default of a bond issuer?
The trustee holding the indenture can sue the issuer on behalf of the bondholders
The most common type of corporate debt is
bonds
Although the interest on a bond is often stated as an annual rate, interest is frequently payable
semiannually
What is correct regarding bonds?
-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
Bonds that systematically mature over a succession of years are referred to as
serial bonds
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
What cash flows are typically associated with already issued bonds
-The face amount at maturity -Periodic interest payments
A bond that sells for less than its face amount is sold at a ____
A bond that sells for less than its face amount is sold at a discount
Convertible bonds are retired when bondholders choose to convert them into shares of ____
Convertible bonds are retired when bondholders choose to convert them into shares of stock
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
The carrying value of bonds at any date after issuance should always be equal to the fair value of the bonds. T/F
False
Hatter Company's new bond issue with face amount of $7 million sells for $6.8 million. What could be imputed from these facts that would 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.
Regarding the effective interest method
Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt
A new bond issue that offers 8% stated interest rate, while bonds of similar risk return 10%, will sell at
a discount
If a bond issues for 99, this means that the company issued the bond at
a discount
If a bond issues for 102, this means that the company issued the bond at
a premium
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
accrued and added to the bond issue price
Adams Corporation's balance sheet reports $100 million in bonds payable. Felix Company who purchased some of Adam's bonds will report the bonds as
an investment
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
When we multiply the face amount of bonds with the stated interest rate, we calculate
the amount of interest paid
If the stated rate is less than the market rate the bond is
unattractive and a discount
