Chapter 9
Callable bonds:
The issuing company can pay off the bonds at any time
Convertible bonds allow the lender to convert each bond into:
common stock
Quattro Lending Company is considering lending a large sum to Eleance Inc. During its decision process, Quattro should especially consider Eleance's existing:
long-term liabilities
A common reason for redeeming a bond prior to its maturity date is that ....
market interest rates decreased.
Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance should include:
- A credit to bonds payable for $100,000 - A debit to discount on bonds payable for $2,000
Term bonds:
Bond issue that matures on a single date
A corporation that wishes to borrow from the general public rather than a bank will issue ....
Bonds
Convertible bonds:
Bonds that can be exchanged for shares of stock in the issuing company
Serial bonds
Bonds that mature in installments
If ABC Company receives $100,000 cash in exchange for issuing 100 bonds at their $1,000 face value, the transaction will be recorded with a ....
debit to Cash of $100,000 and a credit to Bonds payable of $100,000.
The debt to equity and the times interest earned ratios provide investors and creditors with a measure of
financial risk
Bonds will be issued a premium if the stated interest rate is
greater than the market interest rate.
Bonds that are backed by collateral are ______.
secured
Munster Inc. issues $20 million in bonds and pledges its land holdings as collateral. Munster's bonds are:
secured
Most corporate bonds pay interest ....
semiannually
Callable bonds can be redeemed at the choice of ....
the bond issuer
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes ______.
- A debit to interest expense of $6,000 - A credit to cash of $6,000
Periodic payments on installment notes typically include ...
- A portion that reflects interest. - A portion that reduces the outstanding loan balance.
Financing with _____ requires borrowing, whereas financing with _____ requires issuing shares of stock.
- Debt or Liabilities - Equity
The two types of financing are ....
- Equity financing - Debt financing
The journal entry to record the issuing of 100 bonds at their $1,000 face value will include a debit to ______ and a credit to ______.
Cash; bonds payable
What bonds require payment of the full principle amount of the bond at the end of the loan term?
Term bonds
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
Which of the following are correct regarding bonds?
- They obligate the issuing company to repay the bonds at a specific date. - They obligate the issuing company to pay a specific amount.
What are common characteristics or provisions of bonds?
- secured or unsecured - convertible - callable - term or serial
What bond is backed by a lien on specified real estate owned by the issuer?
A secured bond
The Discount on Bonds Payable account is classified as a(n) ___
Contra-liability
What bonds are retired when the bondholder exchanges them for the issuing company's stock?
Convertible bonds
On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?
Credit cash $5,000
On January 1, Year 1, Liang Corporation issues a $100,000 bond at a discount for $95,083. The coupon rate is 10% and the market interest rate is 12%. The bonds pay interest semiannually on June 30 and December 31. The journal entry to record the interest payment on June 30, Year 1 will include which of the following entries?
Debit interest expense $5,705 Credit cash $5,000 Credit discount on bonds payable $705
Identify two ratios commonly used to assess a company's financial risk.
Debt to equity ratio Times interest earned ratio
Totito Inc. issues $100,000 face amount bonds at $98,000. The journal entry to record the issuance of the bonds should include debit(s) to:
Discount on bonds payable for $2,000 Cash for $98,000
Loans requiring periodic payments of interest and principle are referred to as ....
Installment notes
What bonds are supported by a specific asset the issuer pledges as collateral?
Secured bonds
What rate of interest is used to compute the cash interest paid to bondholders?
Stated interest rate
True or False: Bonds may be retired at maturity or retired early.
True
In a private placement of bonds, bonds may be sold to
a single large investor
Dorothea Inc. is selling all of its bonds to a large pension fund. This an example of a(n) ______ placement.
private
When a corporation repurchases its bonds from the bondholders, the corporation _______ the bonds.
retired
The rate of interest printed on the face of a bond is referred to as the ______ interest rate.
stated
True or false: At the date of issue, the stated rate of interest on the bond is always equal to the market rate of interest on the bond.
False
A formal debt instrument that obligates the borrower to repay a stated amount (referred to as the principal or face amount) at a specified maturity date can be a note or a(n) ....
bond.
What rate of interest is an implied rate based on the price investors pay to purchase a bond?
Market interest rate
Bonds that require payment of the full principle amount of the bond at the end of the loan term are referred to as ....
Term bonds
ABC Company issues a bond with a face value of $100,000 at face amount on January 1. The bond carries a stated annual interest rate of 6% payable in cash on December 31 of each year. If ABC issues monthly financial statements, it must make an adjusting entry on January 31 that includes ______.
- A credit to Interest payable of $500 - A debit to Interest expense of $500
