Chapter 14 Smartbook

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 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

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

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

When an accounting period ends between interest dates, interest should be

accrued since the last interest date

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)

Bonds that can be exchanged for shares of stock at the option of the bondholder are referred to as ___ bonds.

convertible

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

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

Schulz Company borrows cash from a bank and signs a promissory note. Schulz should credit

notes payable

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

Zero-coupon bonds typically issue at a deep discount because they

pay no interest

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

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.

Which of the following correctly describes a bond indenture?

A document detailing the promises made by the bond issuer.

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 Reason: The price includes accrued interest of 500,000 * 10% * (3/12)

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 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))

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.

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.

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.

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)

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.

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.

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.

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 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 represents an important difference between bonds with detachable warrants and convertible bonds?

The warrants can be separated from the bonds.

True or false: The interest rate stated in a note is typically equal to the market rate.

True

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

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 interest rate on notes payable typically is equal to the ___ rate.

market

Generally, liabilities are valued at their

present value

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.

Neumann Company issues 20-year bonds. Related to these bonds, Neumann is obligated to

repay a certain amount at a specific date