chapt 14

One potential advantage of financing corporations through the use of bonds rather than common stock is that

the interest expense is deductible for tax purposes by the corporation.

Before deciding on long-term borrowing as part of a financing plan, a key measurement that should be considered is:

a. earnings per share.

Which of the following is not a source of financing for a company?

treasury stock

A bond indenture is

b. the underlying contract between the corporation issuing the bonds and the bondholders.

The market interest rate related to a bond is also called the

d. effective interest rate.

Callable bonds are advantageous to the corporation because

d. the corporation reserves the right to redeem them early.

The journal entry a company records for the issuance of bonds when the contract rate is larger than the market rate of the bond is

d. debit Cash, credit Premium on Bonds Payable and Bonds Payable.

If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $300,000 will be

b. less than $300,000.

A corporation issues for cash $1,000,000 of 8%, 20-year bonds, interest payable annually, at a time when the market rate of interest is 10%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following is true?

d. The amount of unamortized discount decreases from its balance at issuance date to a zero balance at maturity.

On January 1, 2016, Quinton Corporation issued 8% bonds with a face value of $100,000. The bonds are sold for $98,000. The bonds pay interest semiannually on June 30 and December 31, and the maturity date is December 31, 2020. Quinton Corporation records straight-line amortization of the bond discount. The bond interest expense for the year ended December 31, 2016, is

8400

An installment note may be secured by a pledge of the borrower’s assets. Such notes are called

mortgage

The payment of a portion of the amount initially borrowed of an installment note is referred to as

principle only

The entry to record issuance of an installment notes payable would include a

credit to notes payable

Peachtree Company borrows $30,000 from the local bank at 7% interest. The term of the note is five years and the annual payments remain constant at $7,317. Determine the interest expense Peachtree Company should record in the first year.

2100

The balance in Unamortized Discount on Bonds Payable

c. should be reported on the balance sheet as a deduction from the face amount of the related bonds payable.

The portion of bonds or notes payable that is not due within one year is reported as

c. a long-term liability on the balance sheet.

Any unamortized discount is reported

b. as a deduction to the face amount of the bonds.

Numbers of times interest charges are earned is computed as

d. Income Before Income Tax + Interest Expense / Interest Expense.

Why is the number of times interest charges are earned computed using income before income taxes?

c. Because interest payments reduce income tax expense.

Goss Company reported the following on the company’s income statement for the current year.

6

Douglas Company issued 5-year bonds on January 1. The 12% bonds have a face value of $35,000,000 and pay interest every January 1 and July 1. The bonds sold for $37,702,483 based on the market interest rate of 10%. Douglas Company uses the effective interest rate method to amortize bond discounts and premiums. On July 1 of the same year, Douglas Company should record interest expense (rounded to the nearest dollar) of

1,855,124

Which of the following is not an advantage of issuing bonds instead of common stock?

c. Earnings per share on common stock are always lower.

Corporations finance their operations using which of the following?

all

Which of the following is not a source of financing for a company?

treasury

When a corporation issues bonds, the price that buyers are willing to pay for the bonds does not depend on which of the following?

b. denominations in which the bonds are sold.

A bond indenture is

d. the underlying contract between the corporation issuing the bonds and the bondholders.

Callable bonds are advantageous to the corporation because

c. the corporation reserves the right to redeem them early.

_______________ are issued at a discount; however, there is no interest paid on these.

d. US Treasury bills

A $1,000 bond quoted at 100 could be purchased or sold at

1,000

If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $300,000 will be

d. less than $300,000.

Hsu Company issued $100,000 of 8% bonds on January 1, 2016 at face value. The bonds pay interest semiannually on January 1 and July 1. The total interest expense related to these bonds for the year ended December 31, 2016, is

8,000

The payment of a portion of the amount initially borrowed of an installment note is referred to as

d. principal only.

An installment note payment includes

a. principal plus interest.

The entry to record issuance of an installment notes payable would include a

credit to notes payable

Peachtree Company borrows $30,000 from the local bank at 7% interest. The term of the note is five years and the annual payments remain constant at $7,317. Determine the decrease in notes payable that Peachtree Company should record in the first year.

5217

The balance in Unamortized Discount on Bonds Payable

a. should be reported on the balance sheet as a deduction from the face amount of the related bonds payable.

The balance in Unamortized Premium on Bonds Payable should be

c. added to the face amount of the related bonds payable on the balance sheet.

Any unamortized premium is reported

a. as an addition to the face amount of the bonds.

Goss Company reported the following on the company’s income statement for the current year.

60

If the number of times interest charges are earned has increased from 3.0 to 3.5

c. debtholders have increased protection regarding the company’s ability to make its interest payments.

The assets of a company are

akk

Using the following table, what is the present value of $10,000 to be received at the end of each of the next two years at 10% compound interest per period?

17,355.40