YUN KE CHAPTER 14

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 Multiple choice question.

200,000 (Investment in bonds)(FACE AMOUNT)

Grunwald elected to report its 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: Multiple choice question. as part of OCI. as a reduction in interest expense. as part of net income. by disclosing it in the financial statement notes.

as part of OCI

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 x 0.61027) + (3,500 x 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? Multiple choice question. $11,250 $12,500 $37,500

$12,500 Reason: The price includes accrued interest of 500,000 x 10% x 3/12

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 Multiple choice question. increase. stay the same. decrease.

Increase

The fundamental reason why companies issue convertible bonds is to Multiple choice question. ward off hostile takeovers. make the bonds more attractive to investors. improve their debt equity ratio.

make the bonds more attractive to investors.

The interest rate on notes payable typically is equal to the ____ rate. Multiple choice question. short-term borrowing prime market credit

market

Changes in the current ______ often represent a major contributor to changes in the fair value of bonds. coupon interest rate market interest rate stated interest rate

market interest rate

Bonds that do not include a call provision Multiple choice question. may be repurchased on the open market cannot be retired prior to the maturity date must be outstanding until maturity

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 Multiple choice question.

mislead investors.

Schulz Company borrows cash from a bank and signs a promissory note. The bank should record notes receivable accounts receivable notes payable accounts payable

notes receivable

Zero-coupon bonds typically issue at a deep discount because they offer a high interest rate pay no interest offer a low interest rate are high risk bonds

pay no interest

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 Multiple choice question. interest rate stated in the note. maturity amount of the note. value of the purchased equipment.

value of the purchased equipment.

An early extinguishment of debt refers to long-term liability such as bonds that are Multiple choice question. converted to common stock refinanced at maturity retired prior to maturity

retired prior to maturity

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). Multiple choice question. $200,000 $215,567 $183,777 $217,966

217,966 Reason: (200,000 x 0.82035) + (6,000 x 8.98259)

Otto Company purchases bonds with a face amount of $80,000 for $74,000. Which of the following journal entries would be correct? Multiple choice question. Debit bond investment for $80,000; credit gain for $6,000; credit cash for $74,000. Debit investment in bonds for $80,000; credit cash for $80,000. Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.

Debit investment in bonds $80,000; credit discount on bond investment for $6,000; credit cash for $74,000.

A bond that sells for less than its face amount is sold at a

Discount

Which of the following is correct regarding the effective interest method? Multiple choice question. Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt. Interest paid is equal to the effective interest rate multiplied by the maturity value. Interest recorded is equal to the effective interest rate multiplied by the issue price.

Interest expense is equal to the effective interest rate multiplied by the outstanding balance of the debt.

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. Multiple choice question. Periodic interest must be paid Periodic interest is incurred Periodic principal payments must be made

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 should not recognize any interest until April 1, 20X2. Peter should recognize 6 months of interest.

Peter should recognize 3 months of interest.

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 Multiple choice question. $520,000. $560,000. $500,000.

Reason: 520,000 These bonds are sold between interest payment dates so the price includes accrued interest since the last interest date. (500,000 x 12% x 4/12) + 500,000

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

Repay a stated amount at a specified maturity date

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

TRUE

Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) Multiple select question. 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 represents an important difference between bonds with detachable warrants and convertible bonds? Multiple choice question. The warrants can be separated from the bonds. The warrants give the holder the option to purchase additional bonds at a favorable price. Bonds with detachable warrants typically sell for less than convertible bonds.

The warrants can be separated from the bonds.

Which of the following are true regarding bonds sold with detachable warrants? (Select all that apply.) Multiple select question. The warrants can be sold by the bondholder to another investor. 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.

Which of the following are correct regarding bonds? (Select all that apply.) Multiple select question. They obligate the issuing company to pay a specific amount. 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 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 a specific amount. They obligate the issuing company to repay the bonds at a specific date.

Which of the following are among the most important reasons why companies issue convertible instead of nonconvertible bonds? (Select all that apply.) Multiple select question. To provide investors with a means for diversifying investment risk. 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.

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.

Periodic payments on installment notes typically include Multiple select question. a portion that reduces the outstanding loan balance. a portion that reflects interest at the effective interest rate. a portion that reflects interest at the stated interest rate. installment fees.

a portion that reduces the outstanding loan balance. a portion that reflects interest at the effective interest rate.

Which of the following correctly describes a bond indenture? Multiple choice question. A document detailing the promises made by the bond issuer. The portfolio of bonds that are issued during a particular fiscal period. The relationship between the effective interest and the stated interest rates.

A document detailing the promises made by the bond issuer.

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 Reduce the cash proceeds and increase the bonds payable account Increase the cash proceeds and increase the discount and debt issue costs account

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? Multiple choice question. The method is not permitted under current U.S. GAAP. The method can be used if a company irrevocably elects the method on the bond issue date. The method can only be used if it produces results that are not materially different from those produced by the effective interest method.

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 are true regarding zero-coupon bonds? (Select all that apply.) Multiple select question. Zero-coupon bonds pay 5% interest. Zero-coupon bonds are traded at a premium. Zero-coupon bonds do not pay interest.

Zero-coupon bonds do not pay interest.

When an accounting period ends between interest dates, interest should be Multiple choice question. prepaid accrued since the last interest date ignored until the next interest payment date

accrued since the last interest date

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. Reason: (195,000 x 0.04) - ($200,000 x 0.035)

On March 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.) Multiple select question. 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. Reason: These bonds are sold between interest payment dates so the price includes accrued interest.500,000 x 12% x 4/12

Which of the following is a common factor that affects the fair value of a company's bonds? Multiple choice question. changes in global currency rates changes in current market rates changes in the stock fair value of the company's common stock

changes in current market rates

A bond feature that aims at making the bonds more attractive to investors is the ____ feature. Multiple choice question. call redeemable conversion

conversion

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

convertible

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. credit investment in bonds $200,000 debit cash $200,000 credit bonds payable $200,000

credit cash $200,000 debit investment in bonds $200,000.

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

effective interest method

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: Multiple choice question. decrease increase no effect

increase

The specific promises made to bondholders are described in a document called a bond

indenture

Installment notes typically involve the purchase of assets and (Select all that apply.) Multiple select question. periodic payments include principal and interest. require periodic payments of interest and payment of the loan at maturity. require installment payments over time. defer interest payments until maturity.

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 Multiple choice question. plus the first interest payment. minus the first interest payment. minus accrued interest. plus accrued interest.

plus accrued interest

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

Bond issue costs Multiple select question. 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.

If a company elects to report bonds under the fair value option, changes in fair value result in Multiple choice question. reported gain or loss additional discount or premium amortization changes to interest expense

reported gain or loss

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: Multiple choice question. value of the asset or service exchanged return on the company's equity interest rate stated on the note return on the company's debt

value of the asset or service exchanged