Chapter 14 SG

Face value

Amount stated on the face of the bond that serves as the basis for periodic interest computations and represents the amount due at maturity.

Off-balance-sheet financing

An attempt to borrow monies in such a way that the obligations are not recorded.

The following information applies to both questions 9 and 10. On October 1, 2020 Sinatra Corporation issued 5%, 10-year bonds with a par value of $300,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. _____ 9. (L.O. 1) The entry to record the issuance of the bonds would include: A. a credit of $7,500 to Accrued Interest Payable. B. a credit of $12,000 to Premium on Bonds Payable. C. a credit of $288,000 to Bonds Payable. D. a debit of $12,000 to Discount on Bonds Payable.

B

Junk bonds

Bonds that are unsecured and also very risky, and therefore pay a high interest rate.

(L.O. 1) Bonds with par value of $500,000 carrying a stated interest rate of 6% payable semiannually on March 1 and September 1 were issued on July 1. The proceeds from the issue amounted to $510,000. The best explanation for the excess received over par value is: A. the bonds were sold at a premium. B. the bonds were sold at a higher effective interest rate. C. the bonds were issued at par plus accrued interest D. no explanation is possible without knowing the maturity date of the bond issue.

C

(L.O. 1) If bonds are outstanding to maturity any premium or discount as well as any bond issue costs: A. should be written off directly to a bond retirement account as the bond will be redeemed. B. are carried forward and written off in the same manner as that used prior to the maturity date. C. will be fully amortized as their amortization period is designed to coincide with the life of the bond issue. D. should be used to calculate the gain or loss resulting from the maturity of the bonds.

C

(L.O. 1) The Interest Expense related to bonds reported on 2020 income statement of Sinatra Corporation would be: A. $4,050. B. $6,900. C. $3,450. D. $3,750.

C

(L.O. 1) A bond premium should be reported in the balance sheet: A. at the present value of the future reduction in bond interest expense due to the premium. B. as a deferred credit. C. along with other premium accounts such as those resulting from stock transactions. D. as a direct addition to the face amount of the bond

D

(L.O. 1) King Cole Corporation markets a 10-year bond issue dated January 1, 2020. The bonds pay 9% interest semi-annually on January 1 and July 1. If these bonds are sold on September 1, 2020 how many months accrued interest must be paid by the purchaser and over how many months would any premium on the bonds be amortized? Months of Accrued Interest Amortization Period A. 8 120 months B. 8 112 months C. 2 120 months D. 2 112 months

D

(L.O. 1) Which of the following statements correctly depicts the nature of discounts or premiums as applied to a bond issue? A. When bonds are issued at a discount, the seller has an advantage in that interest payments are based upon an amount less than face value. B. The terms "discount" and "premium" are the same as loss and gain, respectively, to both buyer and seller. C. The difference between the effective rate of interest and the market rate of interest is the reason discounts and premiums arise. D. The net cash outflow (ignoring bond issue costs) to the seller of bonds issued at a premium will be less than the maturity value of the bonds plus total interest payments.

D

Indenture

Describes the contractual agreement between the corporation issuing the bonds and the bondholders.

Long-term notes payable

Notes payable that are not expected to be paid within a year or the operating cycle, whichever is longer.

Long-term debt

Probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the business, whichever is longer.

(L.O. 1) Bond discount should be reported in the balance sheet as a direct deduction from the face amount of the bond.

TRUE

(L.O. 1) Bonds issued by a corporation represent a means of borrowing funds from the general public or institutional investors on a long-term basis.

TRUE

(L.O. 1) Long-term debt is ordinarily used by an enterprise as a more or less permanent means of financing to increase the earnings available to stockholders.

TRUE

(L.O. 1) The amortization of a bond discount increases the amount of bond interest expense recorded each period.

TRUE

(L.O. 1) The stated rate of interest on bonds is the rate set by the party issuing the bonds.

TRUE

(L.O. 4) Disclosure is required of future payments for sinking fund requirements and maturity amounts of long-term debt during each of the next 5 years.

TRUE

(L.O. 4) Long-term debt that matures within one year should be reported as a current liability, unless retirement is to be accomplished with other than current assets.

TRUE

(L.O. 4) Two reasons often cited for off-balance sheet financing are: (a) keeping debt off the balance sheet enhances the quality of the balance sheet and permits credit to be obtained more easily and (b) loan covenants often impose a limitation on the amount of debt a company may have.

TRUE

Stated value

The interest rate written in the terms of the bond indenture (and ordinarily printed on the bond certificate).

Effective rate

The rate of interest actually earned by the bondholders.

Premium

When bonds sell for more than face value.

(L.O. 1) If bonds are issued initially at a premium and the effective interest method of amortization is used, interest expense in the earlier years will be: A. greater than if the straight-line method were used. B. greater than the amount of the interest payments. C. the same as if the straight-line method were used. D. less than if the straight line method were used.

A

(L.O. 1) The interest rate actually earned by a bondholder who buys the bond at a discount, as compared to the stated rate on the bond is: Higher Lower A. Yes No B. Yes Yes C. No Yes D. No No

A

(L.O. 1) Generally, long-term debt, in whatever form, is issued subject to various covenants or restrictions for the protection of corporate stockholders.

FALSE

(L.O. 1) If bonds are sold at a premium, the effective rate of interest is greater than the stated rate of interest.

FALSE

(L.O. 1) Under the effective interest method semiannual interest expense is computed by multiplying the effective interest rate times a constant carrying value of the bonds.

FALSE

(L.O. 1) When bonds are issued between interest dates, the purchaser pays for interest accrued since the date the bonds were originally issued.

FALSE

(L.O. 4) Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are recorded in the retained earnings statement.

FALSE