Q&A Hero

Q: Shin Company has a loan agreement that provides it with cash today. The company must repay this loan in four years with $25,000. Shin agrees to a 6% interest rate. The present value factor for four periods, 6%, is 0.7921. What is the amount of cash that Shin Company receives today?

Q: How did Kyle Smitley obtain financing to start her company, barley and birch?

Q: Describe the recording procedures for the issuance, retirement, and paying of interest for notes.

Q: What methods can a company use to retire its bonds?

Q: Explain how a bond premium is amortized. Identify and describe the amortization methods available.

Q: Explain the amortization of a bond discount. Identify and describe the amortization methods available.

Q: Describe the journal entries required to record the issuance of bonds and the payment of bond interest.

Q: Define the debt to equity ratio and explain its use when it comes to analyzing the risk of a companys financial structure.

Q: What is a bond? Identify and discuss the different types of bonds.

Q: Identify and explain the advantages and disadvantages of bond financing.

Q: What is a lease? Be sure to explain the differences between an operating lease and a capital lease.

Q: Explain the accounting procedures when a bond's interest period does not coincide with the issuer's accounting period.

Q: Explain how to record the issuance and sale of a bond between interest payment dates.

Q: Explain the present value concept and how it applies to long-term liabilities.

Q: Identify and explain the different types and payment patterns of notes payable.

Q: Match each of the following terms with the appropriate definitions 1 through 10. 1. Bonds that are made payable to whoever holds them; also called unregistered bonds. Installment note 2. Bonds that mature at more than one date and are usually paid over a number of periods. Bearer bonds 3. An accounting method that allocates interest expense over the bonds' life in a way that yields a constant rate of interest. Unsecured bonds 4. An obligation requiring a series of periodic payments to the lender. Term bonds 5. The interest rate that borrowers are willing to pay and that lenders are willing to accept for a particular bond at its risk level. Bond indenture 6. Bonds that are backed by the issuer's credit standing. Effective interest method 7. Bonds that can be exchanged by the bondholders for a fixed number shares of the issuing corporation's common stock. Coupon bonds 8. Bonds with interest coupons attached to their certificates; the bondholders detach the coupons when they mature and present them to a bank or broker for collection. Market rate 9. Bonds that are scheduled for payment on one specified date. Convertible bonds 10. The contract between the bond issuer and the bondholders; it identifies the rights and obligations of the parties. Serial bonds

Q: Match each of the following terms with the appropriate definitions 1 through 10. 1 The contract between the bond issuer and the bondholder(s); it identifies the rights and obligations of the parties. Secured bonds 2. A series of equal payments at equal intervals. Annuity 3. Bonds that give the issuer an option of retiring them at a stated amount before the date of maturity. Premium on bonds 4. Bonds that require the issuer to create a fund of assets at specified amounts and dates to repay the bonds at maturity. Callable bonds 5. Bonds that have specific assets of the issuer pledged as collateral. Contract rate 6. The ratio of total liabilities to total equity. Bond indenture 7. The difference between the par value of a bond and its higher issue price or carrying value. Sinking fund bonds 8. The interest rate specified in the bond indenture. Carrying value 9. A written promise to pay an amount identified as the par value along with interest at a stated rate. Debt to equity ratio 10. The net amount at which bonds are reported on the balance sheet. Bond

Q: On January 1, 2013, Lane issues $700,000 of 7%, 15-year bonds at a price of 106. The interest payments are made on June 30 and December 31. Lane elects a fiscal year ending September 30. What is the amount that would be recorded as cash paid in the December 31, 2013, journal entry? A. $24,500 B. $22,925 C. $12,250 D. $11,462 E. $13,458

Q: On January 1, 2013, Lane issues $700,000 of 7%, 15-year bonds at a price of 106. The interest payments are made on June 30 and December 31. Lane elects a fiscal year ending September 30. What is the amount that would be recorded as interest expense in the December 31, 2013, journal entry? A. $24,500.00 B. $22,925.00 C. $12,250.50 D. $11,462.50 E. $13,458.00

Q: Interest Payable 11,462.50 Discount on Bond Payable 50 Interest Expense 12,250

Q: Interest Payable 11,462.50 Premium on Bonds Payable 50 Cash 12,250

Q: Interest Expense 11,462.50 Premium on Bonds Payable 50 Interest Payable 12,250

Q: On January 1, 2013, Lane issues $700,000 of 7%, 15-year bonds at a price of 106 3/4. The interest payments are made on June 30 and December 31. The straight-line method is used to amortize any bond discount or premium. Lane elects a fiscal year ending September 30. What is the appropriate adjusting journal entry required for September 30, 2013? A. Interest Expense 22,925 Cash 22,925 B. Interest Expense 22,925 Premium on Bonds Payable 1,575 Cash 24,500 C.

Q: On April 1, 2013, Jared Enterprises issues bonds dated January 1, 2013, that have a $2,430,000 par value, mature in 20 years, and pay 7% interest semiannually on June 30 and December 31. The bonds are sold at par plus three months' accrued interest. What is the total amount of cash Jared Enterprises will collect on April 1, 2013? A. $2,600,100 B. $2,430,000 C. $2,472,525 D. $2,750,000 E. $2,515,050

Q: On January 1, 2013, Jacob issued $600,000 of 11%, 15-year bonds at a price of 102. The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually. All interest has been accounted for (and paid) through December 31, 2018. The company retires 30% of these bonds by buying them on the open market at 98 . What is the journal entry to record the retirement of 30% of the bonds on January 1, 2019? A. Bonds Payable 180,000 Cash 177,300 Discount on Bonds Payable 2,700 B. Bonds Payable 180,000 Loss on Retirement 11,815 Discount on Bonds Payable 2,700 Cash 177,300 C. Bonds Payable 180,000 Discount on Bonds Payable 2,700 Gain on Retirement 177,300 Cash 5,400 D. Bonds Payable 180,000 Premium on Bonds Payable 2,700 Gain on Retirement 5,400 Cash 177,300 E. Bonds Payable 180,000 Cash 180,000

Q: On January 1, 2013, Jacob issued $600,000 of 11%, 15-year bonds at a price of 102. The straight-line method is used to amortize any bond discount or premium and interest is paid semiannually. If all interest has been accounted for properly, what is the carrying value of these bonds on January 1, 2019? A. $472,000 B. $531,076 C. $584,924 D. $609,000 E. $600,000

Q: On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102. The straight-line method is used to amortize any bond premium or discount. What is the total interest expense for the life of these bonds? A. $975,000 B. $964,000 C. $936,000 D. $772,000 E. $990,000

Q: On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the first interest semi-annual interest payment on June 30, 2013? A. Interest Expense 33,000 Cash 33,000 B. Cash 33,000 Interest Expense 33,000 C. Interest Expense 32,500 Discount on Bonds Payable 500 Cash 33,000 D. Interest Expense 32,500 Premium on Bonds Payable 500 Cash 33,000 E. Interest Expense 33,000 Discount on Bonds Payable 500 Cash 32,500

Q: On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102. What is the journal entry to record the issuance of these bonds? A. Cash 600,000 Bonds Payable 600,000 B. Bonds Payable 600,000 Cash 600,000 C. Cash 615,000 Bonds Payable 600,000 Premium on Bonds Payable 15,000 D. Cash 600,000 Premium on Bonds Payable 15,000 Bonds Payable 615,000 E. Cash 600,000 Discount on Bonds Payable 9,000 Bonds Payable 609,000

Q: On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105 . All semiannual interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the retirement of 20% of the bonds on January 1, 2019? A. Bonds Payable 160,000 Cash 156,985 Discount on Bonds Payable 3,015 B. Bonds Payable 160,000 Loss on Retirement 11,815 Discount on Bonds Payable 3,015 Cash 168,800 C. Bonds Payable 160,000 Discount on Bonds Payable 3,015 Cash 168,800 Gain on Retirement 5,785 D. Bonds Payable 160,000 Premium on Bonds Payable 2,585 Discount on Bonds Payable 3,015 Cash 154,400 E. Bonds Payable 168,800 Cash 168,800

Q: On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105 . All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the carrying value of the bond on January 1, 2019? A. $772,000 B. $831,076 C. $784,924 D. $277,000 E. $800,000

Q: On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105 . All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the first semiannual interest payment on June 30, 2013? A. Interest Expense 36,000 Cash 36,000 B. Cash 36,000 Interest Expense 36,000 C. Interest Expense 36,000 Discount on Bonds Payable 1,077 Cash 37,077 D. Interest Expense 36,000 Premium on Bonds Payable 1,077 Cash 37,077 E. Interest Expense 37,077 Discount on Bonds Payable 1,077 Cash 36,000

Q: On January 1, 2013, Jacob issues $800,000 of 9%, 13-year bonds at a price of 96. Six years later, on January 1, 2019, Jacob retires 20% of these bonds by buying them on the open market at 105 . All interest is accounted for and paid through December 31, 2018, the day before the purchase. The straight-line method is used to amortize any bond discount or premium. What is the journal entry to record the issuance of the bonds on January 1, 2013? A. Cash 800,000 Bonds Payable 800,000 B. Bonds Payable 800,000 Cash 800,000 C. Cash 800,000 Bonds Payable 772,000 Discount on Bonds Payable 28,000 D. Cash 772,000 Premium on Bonds Payable 28,000 Bonds Payable 800,000 E. Cash 772,000 Discount on Bonds Payable 28,000 Bonds Payable 800,000

Q: A corporation borrowed $125,000 cash by signing a five-year, 9% installment note requiring annual payments each December 31 of accrued interest plus equal amounts of principal. What journal entry would the issuer record for the first payment? A. Interest Expense 2,250 Notes Payable 25,000 Cash 27,250 B. Notes Payable 27,250 Interest Payable 2,250 Cash 25,000 C. Interest Expense 11,250 Notes Payable 25,000 Cash 36,250 D. Notes Payable 25,000 Cash 25,000 E. Notes Payable 11,250 Cash 11,250

Q: On October 1, a $30,000, 6%, three-year installment note payable is issued by a company. The note requires that $10,000 of principal plus accrued interest be paid at the end of each year on September 30. The issuer's journal entry to record the second annual interest payment would include: A. A debit to Interest Expense for $1,800. B. A debit to Interest Expense for $1,200. C. A credit to Cash for $11,800. D. A credit to Cash for $10,000. E. A debit to Notes Payable for $1,200.

Q: A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date five years later, after the bond interest was paid and after 40% of the premium had been written off, the corporation purchased the entire issue on the open market at 99 and retired it. The gain or loss on this retirement is: A. $0 B. $10,000 gain C. $10,000 loss D. $22,000 gain E. $22,000 loss

Q: A company retires its bonds at 105. The carrying value of the bonds at the date of is $103,745. The issuer's journal entry to record the retirement will include a: A. Debit to Premium on Bonds. B. Credit to Premium on Bonds. C. Debit to Discount on Bonds. D. Credit to Gain on Bond Retirement. E. Credit to Bonds Payable.

Q: A company has bonds outstanding with a par value of $100,000. The unamortized premium on these bonds is $2,700. If the company retired these bonds at a call price of 99, the gain or loss on this retirement is: A. $1,000 gain B. $1,000 loss C. $2,700 loss D. $2,700 gain E. $3,700 gain

Q: A company has bonds outstanding with a par value of $400,000. The unamortized premium on these bonds is $2,000. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement? A. $0 gain or loss B. $10,000 gain C. $10,000 loss D. $14,000 gain E. $14,000 loss

Q: A company has bonds outstanding with a par value of $600,000. The unamortized discount on these bonds is $3,000. The company retired these bonds by buying them on the open market at 98. What is the gain or loss on this retirement? A. $0 gain or loss B. $9,000 gain C. $9,000 loss D. $14,500 gain E. $14,500 loss

Q: A company has bonds outstanding with a par value of $100,000. The unamortized discount on these bonds is $4,500. The company retired these bonds by buying them on the open market at 97. What is the gain or loss on this retirement? A. $0 gain or loss B. $1,500 gain C. $1,500 loss D. $3,000 gain E. $3,000 loss

Q: Bonds that give the issuer an option of retiring them prior to the date of maturity are: A. Debentures B. Serial bonds C. Sinking fund bonds D. Registered bonds E. Callable bonds

Q: A company issued five-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using the effective interest method, the amount of recorded interest expense for the first semiannual interest period is: A. $3,500.00 B. $7,000.00 C. $3,286.95 D. $6,573.90 E. $1,750.00

Q: A company issued seven-year, 8% bonds with a par value of $200,000. The market rate when the bonds were issued was 5.5%. The company received $203,010 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is: A. $8,000 B. $8,215 C. $7,785 D. $16,000 E. $4,990

Q: A company issued five-year, 7% bonds with a par value of $100,000. The market rate when the bonds were issued was 6.5%. The company received $101,137 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is: A. $3,386.30 B. $3,500.00 C. $3,613.70 D. $6,633.70 E. $7,000.00

Q: A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a: A. Credit to Interest Income. B. Credit to Premium on Bonds Payable. C. Credit to Discount on Bonds Payable. D. Debit to Premium on Bonds Payable. E. Debit to Discount on Bonds Payable.

Q: Adidas issued 10-year, 8% bonds with a par value of $200,000, where interest is paid semiannually. The market rate on the issue date was 7.5%. Adidas received $206,948 in cash proceeds. Which of the following statements is true? A. Adidas must pay $200,000 at maturity and no interest payments. B. Adidas must pay $206,948 at maturity and no interest payments. C. Adidas must pay $200,000 at maturity plus 20 interest payments of $8,000 each. D. Adidas must pay $206,948 at maturity plus 20 interest payments of $8,000 each. E. Adidas must pay $200,000 at maturity plus 20 interest payments of $7,500 each.

Q: The Premium on Bonds Payable account is a(n): A. Revenue account. B. Adjunct or accretion liability account. C. Contra revenue account. D. Asset account. E. Contra expense account.

Q: The market value of a bond is equal to: A. The present value of all future cash payments provided by a bond. B. The present value of all future interest payments provided by a bond. C. The present value of the principal for an interest-bearing bond. D. The future value of all future cash payments provided by a bond. E. The future value of all future interest payments provided by a bond.

Q: A company issued 10%, five-year bonds with a par value of $400,000. The market rate when the bonds were issued was 8%. The company received $432,458 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is: A. $16,000.00 B. $20,000.00 C. $4,324.58 D. $17,298.32 E. $16,754.20

Q: A company issued 7%, five-year bonds with a par value of $100,000. The market rate when the bonds were issued was 7.5%. The company received $97,947 cash for the bonds. Using the effective interest method, the amount of interest expense for the first semiannual interest period is: A. $3,750.00 B. $3,673.01 C. $3,705.30 D. $3,428.15 E. $7,346.03

Q: Which of the following is true regarding the effective interest amortization method? A. Allocates bond interest expense using a changing interest rate. B. Allocates bond interest expense using a constant interest rate. C. Allocates a decreasing amount of interest over the life of a discounted bond. D. Allocates bond interest expense using the current market rate for each period. E. Is not allowed by the FASB.

Q: A company issued five-year, 7% bonds with a par value of $100,000. The company received $97,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is: A. $3,294.70 B. $3,500.00 C. $3,705.30 D. $7,000.00 E. $7,410.60

Q: On January 1, 2013, a company issued and sold an $850,000, 6%, five-year bond payable and received proceeds of $825,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is: A. Bond Interest Expense 25,500 Cash 25,500 B. Bond Interest Expense 51,000 Cash 51,000 C. Bond Interest Expense 28,000 Discount on Bonds Payable 2,500 Cash 25,500 D. Bond Interest Expense 23,000 Discount on Bonds Payable 2,500 Cash 25,500 E. Bond Interest Expense 25,500 Discount on Bonds Payable 2,500 Cash 28,000

Q: On January 1, 2013, a company issued and sold a $400,000, 7%, 10-year bond payable and received proceeds of $396,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is: A. Bond Interest Expense 14,000 Cash 14,000 B. Bond Interest Expense 28,000 Cash 28,000 C. Bond Interest Expense 14,200 Cash 14,000 Discount on Bonds Payable 200 D. Bond Interest Expense 13,800 Discount on Bonds Payable 200 Cash 14,000 E. Bond Interest Expense 14,000 Discount on Bonds Payable 200 Cash 14,200

Q: A discount on bonds payable: A. Occurs when a company issues bonds with a contract rate less than the market rate. B. Occurs when a company issues bonds with a contract rate more than the market rate. C. Increases the Bond Payable account. D. Decreases the total bond interest expense. E. Is not allowed in many states to protect creditors.

Q: The Discount on Bonds Payable account is: A. A liability B. A contra liability C. An expense D. A contra expense E. A contra equity

Q: Amortizing a bond discount: A. Allocates a part of the total discount to each interest period. B. Increases the market value of the Bonds Payable. C. Decreases the Bonds Payable account. D. Decreases interest expense each period. E. Increases cash flows from the bond.

Q: A company issues 9%, 20-year bonds with a par value of $750,000. The current market rate is 9%. The amount of interest owed to the bondholders for each semiannual interest payment is. A. $0 B. $33,750 C. $67,500 D. $750,000 E. $1,550,000

Q: A bond sells at a discount when the: A. Contract rate is above the market rate. B. Contract rate is equal to the market rate. C. Contract rate is below the market rate. D. Bond has a short-term life. E. Bond pays interest only once a year.

Q: When a bond sells at a premium: A. The contract rate is above the market rate. B. The contract rate is equal to the market rate. C. The contract rate is below the market rate. D. It means that the bond is a zero coupon bond. E. The bond pays no interest.

Q: What is the debt to equity ratio for a company that has $700,000 in total liabilities and $3,500,000 in total equity? A. 20% B. 5 C. $2,100,000 D. 2% E. .5

Q: Using the debt to equity ratio, which of the following franchises would be assessed as having the riskiest financing structure? Franchise A Franchise B Franchise C Franchise D Franchise E Total liabilities $240,000 $120,000 $300,000 $500,000 $270,000 Total equity $60,000 $20,000 $150,000 $100,000 $90,000 A. Franchise A B. Franchise B C. Franchise C D. Franchise D E. Franchise E

Q: Bonds with a par value of less than $1,000 are known as: A. Junk bonds B. Baby bonds C. Callable bonds D. Unsecured bonds E. Convertible bonds

Q: Bonds that mature at different dates and end up with the total principal repaid gradually over a number of periods are referred to as: A. Registered bonds B. Bearer bonds C. Callable bonds D. Sinking fund bonds E. Serial bonds

Q: The contract between the bond issuer and the bondholders, which identifies the rights and obligations of the parties, is called a(n): A. Debenture B. Bond indenture C. Mortgage D. Installment note E. Mortgage contract

Q: Bonds owned by investors whose names and addresses are recorded by the issuing company and for which interest payments are made with checks to the bondholders, are called: A. Callable bonds B. Serial bonds C. Registered bonds D. Coupon bonds E. Bearer bonds

Q: Bonds that have interest coupons attached to their certificates, which the bondholders detach during each interest period and present to a bank for collection, are called: A. Coupon bonds. B. Callable bonds. C. Serial bonds. D. Convertible bonds. E. Clip and Carry bonds.

Q: Secured bonds: A. Are also referred to as debentures. B. Have specific assets of the issuing company pledged as collateral. C. Are backed by the issuer's bank. D. Are subordinated to those of other unsecured liabilities. E. Are the same as sinking fund bonds.

Q: A bond traded at 102 means that: A. The bond pays 2.5% interest. B. The bond traded at $1,025 per $1,000 bond. C. The market rate of interest is 2.5%. D. The bonds were retired at $1,025 each. E. The market rate of interest is 2% above the contract rate.

Q: Bonds that have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity are known as: A. Convertible bonds B. Sinking fund bonds C. Callable bonds D. Serial bonds E. Junk bonds

Q: Sinking fund bonds: A. Require the issuer to set aside assets in order to retire the bonds at maturity. B. Require equal payments of both principal and interest over the life of the bond issue. C. Decline in value over time. D. Are registered bonds. E. Are bearer bonds.

Q: A bondholder that owns a $1,000, 10%, 10-year bond has: A. Ownership rights in the company who issued the bond. B. The right to receive $10 per year until maturity. C. The right to receive $1,000 at maturity. D. The right to receive $10,000 at maturity. E. The right to receive dividends of $1,000 per year.

Q: Which of the following statements is true? For the issuer: A. Interest paid on bonds is tax deductible. B. Interest paid on bonds is not tax deductible. C. Dividends paid to stockholders are tax deductible. D. Bonds are assets. E. Bonds always decrease return on equity.

Q: Operating leases differ from capital leases in that A. For a capital lease, the lessee records the lease payments as rent expense, but for an operating lease, the lessee reports the lease payments as depreciation expense. B. For an operating lease, the lessee depreciates the asset acquired under lease, but for the capital lease, the lessee does not. C. Operating leases create a long-term liability on the balance sheet, but capital leases do not. D. Operating leases do not transfer ownership of the asset under the lease, but capital leases often do. E. Operating lease payments are generally greater than capital lease payments.

Q: A company issues bonds at par on June 1. These 7% bonds have a par value of $500,000 and pay interest annually. June 1 is five months after the most recent interest payment date. How much total cash interest is received on June 1 by the bond issuer? A. $0 B. $2,916.66 C. $100,000.00 D. $14,583.33 E. $35,000.00

Q: A company issues bonds at par on April 1. These 9% bonds have a par value of $100,000 and pay interest annually. April 1,is four months after the most recent interest payment date. How much total cash interest is received on April 1 by the bond issuer? A. $750 B. $5,250 C. $1,500 D. $3,000 E. $6,000

Q: If an issuer sells a bond at any other date than the interest payment date: A. This means the bond sells at a premium. B. This means the bond sells at a discount. C. The issuing company will report a loss on the sale of the bond. D. The issuing company will report a gain on the sale of the bond. E. The buyer normally pays the issuer the purchase price plus any interest accrued since the last interest payment date.

Q: A company purchased equipment and signed a seven-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value factor for an annuity for seven years at 9% is 5.0330. What value for this equipment should be recorded on the companys books on the day the contract is signed? A. $9,000 B. $5,033 C. $63,000 D. $57,330 E. $45,297

Q: A company borrowed $50,000 cash from the bank and signed a six-year note at 7%. The present value factor for an annuity for six years at 7% is 4.7665. The annual annuity payments equal $10,490. The present value of the loan is: A. $10,490 B. $11,004 C. $50,000 D. $52,450 E. $238,325