Chapter 22 ("Long Term Bonds")

Question 1

Bonds payable

Answer 1

Long-term debt instruments that are written promises to repay the principal at a future date; interest is due at a fixed rate payable over the life of the bond

Question 2

Collateral trust bonds

Answer 2

Bonds secured by the pledge of securities, such as stocks or bonds of other companies

Question 3

Secured bonds

Answer 3

Bonds for which property is pledged to secure the claims of bondholders

Question 4

bond indenture

Answer 4

A bond contract

Question 5

debentures

Answer 5

Unsecured bonds backed only by a corporation’s general credit.

Question 6

Registered bonds

Answer 6

Bonds issued to a party whose name is listed in the corporation’s records

Question 7

coupon bonds

Answer 7

Unregistered bonds that have coupons attached for each interest payment; also called bearer bonds.

Question 8

serial bonds

Answer 8

Bonds issued at one time but payable over a period of years

For example, a corporation might issue serial bonds totaling $10 million, dated January 1, 2013, with $2,000,000 maturing each year for five years, beginning on January 1, 2023. The corporation might find it easier to retire bonds on a serial basis rather than to have all $10 million due on the same date.

Question 9

Mature

Answer 9

to fall due or to become payable.

Question 10

Convertible bonds

Answer 10

Bonds that give the owner the right to convert the bonds into common stock under specified conditions

For example, an indenture can give the holder of a 20-year, $1,000 bond the right to convert the bond into 50 shares of the corporation’s common stock at any time. When the price of the stock reaches $20 or more ($1,000 bond ÷ 50 shares of stock), the bondholder is likely to convert it into stock.

Question 11

Callable bonds

call price

Answer 11

Bonds that allow the issuing corporation to require the holder to surrender the bonds for payment before their maturity date

call price: The amount the corporation must pay for the bond when it is called

Usually the call price is slightly above the face value. If the market interest rate declines below the face interest rate on the bonds, or if the corporation has excess cash, it might call all or part of the bonds and retire them.

Question 12

Market interest rate

Face interest rate

Answer 12

Market interest rate: The interest rate a corporation is willing to pay and investors are willing to accept at the current time refers to the interest rate a corporation is willing to pay and investors are willing to accept at the current time.

Face interest rate: The contractual interest specified on the bond refers to the contractual interest rate specified on the bond.

Market interest rate changes constantly. Face interest rate of a bond does not change.

For example, assume that on October 1, 2013, DEL Corporation issues 20-year bonds with a face value of $100,000. The bonds mature on October 1, 2033. Under the terms of the indenture, DEL can call the bonds at any time after October 1, 2023, at a call price of 103 (103 percent of face value). The bonds are called by DEL on October 1, 2024. Johanson, an owner of bonds with a face value of $30,000, must surrender the bonds and will be paid $30,900 ($30,000 × 1.03).

Question 13

Stock versus Bonds as a Financing Method

Answer 13

When deciding whether to issue bonds, a company needs to determine whether the rate of return on the assets acquired with the bond proceeds is higher than the interest rate paid on the bonds.

Question 14

trading on the equity / leveraging

Answer 14

Using borrowed funds to earn a profit higher than the interest that must be paid on the borrowing is called trading on the equity, or leveraging.

Question 15

bond sinking fund investment

Answer 15

A fund established to accumulate assets to pay off bonds when they mature.

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Question 16

carrying value of bonds

Answer 16

The balance of the Bonds Payable account plus the Premium on Bonds Payable account minus the Discount on Bonds Payable account; also called book value of bonds,

Carrying value of bonds always moves toward the face value.

Question 17

Any significant gain or loss from the early retirement of bonds should be shown as an extraordinary gain or loss on the income statement.
True
False

Answer 17

T

Question 18

When the issuing corporation has the right to require the owners to surrender the bonds for payment before the maturity date of the bonds, the bonds are referred to as

• serial bonds.
• convertible bonds.
• registered bonds.
• callable bonds.

Answer 18

callable bonds.

Question 19

If market interest rates are higher than the rate offered on the bonds being sold, they will be sold at

• a premium.
• a discount.
• face value.
• a loss.

Answer 19

a discount

Question 20

The Premium on Bonds Payable account is shown

in the Current Assets section of the balance sheet.
in the Current Liabilities section of the balance sheet.
in the Long-Term Liabilities section of the balance sheet.
in the Revenue section of the income statement.

Answer 20

in the Long-Term Liabilities section of the balance sheet.

The Premium on Bonds Payable account has a normal credit balance. It is shown as an addition to the face value of bonds payable on the balance sheet. The Discount on Bonds Payable account has a normal debit balance; it is subtracted from the face value of bonds payable on the balance sheet.

Question 21

The entry to record the adjustment for accrued bond interest includes

• a debit to Bond Interest Expense and a credit to Cash.
• a debit to Bond Interest Expense and a credit to Bond Interest Payable.
• a debit to Bond Interest Payable and a credit to the Bond Interest Expense.
• a debit to Bond Interest Expense and a credit to Bonds Payable.

Answer 21

-a debit to Bond Interest Expense and a credit to Bond Interest Payable.

Question 22

To systematically accumulate cash for the retirement of bonds at maturity, a corporation may set up a bond sinking fund investment.
True
False

Answer 22

T

Question 23

When bonds are sold at a market price of 105, the cash received for the bonds is 105 percent of face value.
True
False

Answer 23

T

Question 24

When bonds are issued at a premium, the annual interest expense reported will be greater than the annual cash interest payments.
True
False

Answer 24

F

Amortizing the discount increases the bond interest expense shown on the income statement. プレミアムは逆。

Question 25

The Bond Sinking Fund Investment account is reported as an investment in the Assets section of the balance sheet.
True
False

Answer 25

T

Question 26

If bonds are issued for a price below their face value, the bond discount should be

• charged to expense on the date the bonds are issued.
• amortized over the life of the bond issue.
• shown as an addition to Bonds Payable in the Long-Term Liabilities section of the balance sheet.
• shown as a current liability on the balance sheet.

Answer 26

-amortized over the life of the bond issue.

Question 27

Investors will pay an amount greater than the face amount of a bond if the face interest rate on bonds is greater than the market interest rate.
True
False

Answer 27

T

Question 28

A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized premium balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of
$7,000.
$4,000.
$1,000.
$3,000.

Answer 28

＄１０００

unamortized premiumはlossを減らす。

Question 29

A corporation paid $104,000 to retire bonds with a face value of $100,000 and an unamortized discount balance of $3,000. The entry to record the early retirement of the bonds will include the recognition of a loss of
$7,000.
$4,000.
$1,000.
$3,000.

Answer 29

＄７０００

Unamortized discountはlossを増やす。

Question 30

Retained Earnings Appropriated for Bond Retirement appears as a separate line item

on the Income Statement.
on the Balance Sheet.
on the Bond Interest Reconciliation Schedule.
on the Statement of Cash Flows.

Answer 30

on the Balance Sheet.

Question 31

The issuing corporation has the right to require the owner of a convertible bond to surrender the bond for payment before the maturity date of the bond.
True
False

Answer 31

F

Convertible bonds give the owner the right to convert the bonds into common stock under specified conditions.

Callable bonds allow the issuing corporation to require the holders to surrender the bonds for payment before their maturity date.

Question 32

A bond sinking fund investment is started on January 5, 2013, by transferring $12,000 in cash to the fund. This $12,000 is invested and earns $1,500 during 2013. On January 5, 2014, the amount of cash transferred to the sinking fund investment will be
$10,500.
$12,000.
$13,500.
$1,500.

Answer 32

$10,500.

Question 33

Bonds issued at a premium are
traded for stock.
sold at face value.
sold at less than face value.
sold for more than face value.

Answer 33

sold for more than face value.

Question 34

On December 31, 2013, a corporation issued $200,000 face value, 12 percent bonds that mature 10 years from the date of issue. The issue price was 97. If the firm uses the straight-line method of amortization, interest expense for 2014 will be reported at
$24,600.
$24,000.
$23,400.
$19,400.

Answer 34

$24,600

($200,000)(0.12)=$24,000 interest expense per year
($200,000)(.97)=$194,000
discount = $6,000
($6,000)(1/10years)=$600 amortization per year

$24.000+$600=$24,600

Question 35

When bonds mature, a corporation will pay the bondholders
the current market value of the bonds.
the face amount plus the original premium or minus the original discount.
the face amount plus the interest accrued since the date the bonds were issued.
the face amount of the bonds.

Answer 35

the face amount of the bonds.

Question 36

Bond interest is not deducted when a corporation determines its taxable income.
True
False

Answer 36

F