Recording bond issuance at par, interest payments, bond maturity
Sinking fund bonds:
a. Require the issuer to set aside assets to pay 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.
a. Require the issuer to set aside assets to pay bonds at maturity.
The carrying value of bonds at maturity always equals:
a. the amount of cash originally received in exchange for the bonds.
b. the par value of the bond.
c. the amount of discount or premium.
d. the amount of cash originally received in exchange for the bonds plus any unamortized discount or less any premium.
e. The amount in excess of par value.
b. the par value of the bond.
A liability requiring a series of payments to the lender is referred to as a(n):
a. Debenture. b. Discounted note. c. Installment note. d. Indenture. e. Investment note.
c. Installment note.
A company's total liabilities divided by its total equity is called the:
a. Equity ratio.
b. Return on total assets ratio.
c. Pledged assets to secured liabilities ratio.
d. Debt-to-equity ratio.
e. Times secured liabilities earned ratio.
d. Debt-to-equity ratio.
Bonds that give the issuer the option to retire them at a stated dollar amount before maturity are known as:
a. Convertible bonds.
b. Sinking fund bonds.
c. Callable bonds.
d. Serial bonds.
e. Junk bonds.
c. Callable bonds.
A $1,000 bond trading at 103½ means that:
a. The bond pays 3.5% interest.
b. The bond traded is bought or sold for $1,035.
c. The market rate of interest is 3.5%.
d. The bonds were retired at $1,035 each.
e. The market rate of interest is 3½% above the contract rate.
b. The bond traded is bought or sold for $1,035.
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.
b. A contra liability.
On July 1, Shady Creek Resort borrowed $490,000 cash by signing a 10-year, 11% installment note requiring equal payments each June 30 of $83,203. What amount of interest expense will be included in the first annual payment?
a. $83,203 b. $29,303 c. $53,900 d. $49,000
e. $460,697
c. $53,900
$490,000 principal × 11% = $53,900 interest
The debt-to-equity ratio:
a. Is calculated by dividing book value of secured liabilities by book value of pledged assets.
b. Is a measure used to assess the risk of a company's financing structure.
c. Is not relevant to secured creditors.
d. Can always be calculated from information provided in a company's income statement.
e. Must be calculated from the market values of assets and liabilities.
b. Is a measure used to assess the risk of a company's financing structure.
Secured bonds:
a. Are called debentures.
b. Have specific assets of the issuer 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.
b. Have specific assets of the issuer pledged as collateral.
The legal contract between the bond issuer and the bondholders is called a(n):
a. Debenture.
b. Bond indenture.
c. Mortgage.
d. Installment note.
e. Term bond.
b. Bond indenture.
A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is:
a. Debit Bond Interest Expense $22,000; credit Cash $22,000.
b. Debit Bond Interest Expense $44,000; credit Cash $44,000.
c. Debit Bond Interest Payable $22,000; credit Cash $22,000.
d. Debit Bond Interest Expense $550,000; credit Cash $550,000.
e. No entry is needed, since no interest is paid until the bond is due
a. Debit Bond Interest Expense $22,000; credit Cash $22,000.
$550,000 × 0.08 × ½ year = $22,000
On July 1, Shady Creek Resort borrowed $250,000 cash by signing a 10-year, 8% installment note requiring equal payments each June 30 of $37,258. What amount of the first annual payment goes toward principal reduction of the note?
a. $20,000.
b. $37,258.
c. $25,000.
d. $232,742.
e. $17,258.
e. $17,258.
$250,000 principle × 8% = $20,000 interest
$37,258 payment − 20,000 interest = $17,258 principal payment
A company’s balance sheet reveals it has total assets of $6,920,700, total liabilities of $1,905,700, and total equity of $5,015,000. The current debt-to-equity ratio for this company is:
a. 0.28. b. 0.38. c. 0.72. d. 2.63. e. 3.63.
b. 0.38.
$1,905,700/$5,015,000 = 0.38
Bonds that mature at more than one date and thus are usually repaid over a number of periods are known as:
a. Registered bonds.
b. Bearer bonds.
c. Callable bonds.
d. Sinking fund bonds.
e. Serial bonds.
e. Serial bonds.
On January 1, Sustainable Energy Corporation issues bonds that have a $100,000 par value, mature in 8 years, and pay 12% interest per year. Interest payments are paid to bondholders semiannually on June 30 and December 31. How much interest does Sustainable Energy Corporation pay to bondholders every six months if the bonds are sold at par?
a. $ 1,200. b. $ 3,000. c. $ 6,000. d. $ 12,000.
e. $ 100,000.
c. $ 6,000.
$100,000 × 0.12 × 1/2 = $6,000
On January 1, Parson Freight Company issues 7.0%, 10-year bonds with a par value of $3,000,000. The bonds pay interest semiannually. The market rate of interest is 8.0% and the bond selling price was $2,796,147. The bond issuance should be recorded as:
a. Debit Cash $3,000,000; credit Bonds Payable $3,000,000.
b. Debit Cash $2,796,147; credit Bonds Payable $2,796,147.
c. Debit Cash $3,000,000; credit Bonds Payable $2,796,147; credit Discount on Bonds Payable $203,853.
d. Debit Cash $2,796,147; debit Discount on Bonds Payable $203,853; credit Bonds Payable $3,000,000.
e. Debit Cash $2,796,147; debit Interest Expense $203,853; credit Bonds Payable $3,000,000.
d. Debit Cash $2,796,147; debit Discount on Bonds Payable $203,853; credit Bonds Payable $3,000,000.
A company calls its bonds at a price of $105,000. The face value is $100,000 and the carrying value of the bonds at the retirement date 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.
a. Debit to Premium on Bonds.
Carrying value of bonds $ 103,745
Less: Retirement price 105,000
= Loss on retirement $ 1,255
Bonds Payable 100,000
Premium on Bonds Payable 3,745
Loss on Bond Retirement 1,255
Cash 105,000
A company’s balance sheet reveals it has total assets of $780,000, total liabilities of $280,000, and total equity of $500,000. The current debt-to-equity ratio for this company is:
a. 0.36. b. 0.56. c. 0.64. d. 1.79. e. 2.79.
b. 0.56.
$280,000/$500,000 = 0.56
A disadvantage of bond financing is:
a. Bonds do not affect owners' control.
b. Interest on bonds is tax deductible.
c. Bonds can increase return on equity.
d. Bonds pay periodic interest and require the repayment of par value at maturity.
e. All of the choices listed are disadvantages.
d. Bonds pay periodic interest and require the repayment of par value at maturity.
A bondholder that owns a $1,000, 10%, 10-year bond has:
a. Ownership rights in the issuing company.
b. The right to receive $10 semiannually 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.
c. The right to receive $1,000 at maturity.
On January 1, 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 carrying value of the bonds immediately after the second interest payment is:
a. $400,000.
b. $399,800.
c. $396,400.
d. $395,800.
e. $396,200.
c. $396,400.
Discount amortized = ($400,000 − $396,000)/20 = $200
Carrying Value = $400,000 bond payable less $3,600 unamortized discount ($4,000 − (2 × $200)).
A corporation issued 8% bonds with a par value of $1,000,000, receiving a $20,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation called the bonds at $990,000. 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.
d. $22,000 gain.
Par value $ 1,000,000
Add: Unamortized premium (20,000 × 60%) 12,000
= Carrying value of bonds $ 1,012,000
Less: Retirement price 990,000
= Gain on retirement $ 22,000
Charger Company's most recent balance sheet reports total assets of $29,862,000, total liabilities of $17,262,000 and total equity of $12,600,000. The debt to equity ratio for the period is (rounded to two decimals):
a. 0.58 b. 1.73 c. 0.42 d. 0.73 e. 1.37
e. 1.37
$17,262,000/$12,600,000 = 1.37
A corporation issued 8% bonds with a par value of $1,120,000, receiving a $44,000 premium. On the interest date 5 years later, after the bond interest was paid and after 40% of the premium had been amortized, the corporation called the bonds at $1,108,800. The gain or loss on this retirement is:
a. $0. b. $11,200 gain. c. $11,200 loss.
d. $37,600 gain. e. $37,600 loss.
d. $37,600 gain.
Par value $ 1,120,000
Add:Unamortized premium (44,000 × 60%) 26,400
= Carrying value of bonds $ 1,146,400
Less: Retirement price 1,108,800
= Gain on retirement $ 37,600