Accounting 201Chapter 09 Power Point

Question 1

Explain financing alternatives:Debt Financing?

Answer 1

borrowing money (liabilities).

Question 2

Explain financing alternatives:Equity Financing?

Answer 2

obtaining additional investmentfrom stockholders (stockholders’ equity).

Question 3

Explain financing alternatives:Capital Structure?

Answer 3

is the mixture of liabilities andstockholders’ equity used by a business.

Question 4

What are the five points that define a bond?

Answer 4

1) A formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date.2) In return, the borrower agrees to pay interest over the life of the bond.3) Similar to notes payable, except bonds are usually issued to many lenders at the same time.4) Traditionally, interest on bonds is paid twice a year (semi-annually).5) Bonds are sold or underwritten by investment houses like JPMorgan, Citibank and Bank of America.

Question 5

Issue bond price is calculated as?

Answer 5

The present value of the face amount plus the present value of the periodic interest payments.

Question 6

What three amounts can bonds be issued at?

Answer 6

1) Face amount2) Below face amount (discount)3) Above face amount (premium)

Question 7

What is Market Interest Rate?

Answer 7

True interest rate used by investors to value a company’s bond issue.

Question 8

The higher the market interest rate, the higher or lower will be the bond issue price.

Answer 8

lower

Question 9

What is Stated Interest Rate?

Answer 9

Rate quoted in the bond contract used to calculate the cash payments for interest.

Question 10

What are Periods to Maturity?

Answer 10

number of years to maturity multiplied by the number of interest payments per year.

Question 11

Account for the issuance of bonds:On January 1, 2012, RC Enterprises issues $100,000 of 7% bonds, due in 10 years, with interest payable semi-annually on June 30 and December 31 each year.

Answer 11

Cash 100,000 DebitBonds Payable 100,000 Credit

Question 12

Account for the issuance of bonds:The bonds issue for exactly $100,000, assuming a 7% market interest rate. RC Enterprises records the bond issue as: ($3500)

Answer 12

Interest Expense 3,500 DebitCash 3,500 Credit(Record semiannual interest payment)($100,000 x 7% 3 1/2 = $3,500)

Question 13

When the issuing corporation buys back its bonds from the investors, it is said that the company has?

Answer 13

retired those bonds

Question 14

A company can wait until the bonds mature to retire them, or in most cases, the issuer will choose?

Answer 14

to buy the bonds back early

Question 15

Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value at maturity will equal their?

Answer 15

face amount.

Question 16

Record the retirement of its bond at maturity as:

Answer 16

Bonds Payable 100,000 DebitCash 100,000 Credit

Question 17

When the issuer retires debt of any type before its scheduled maturity date, the transaction is called an?

Answer 17

extinguishment of debt.