Chapter 14 Flashcards Preview

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Flashcards in Chapter 14 Deck (33):
1

A __________ and a __________ are two sides of the same coin.

note payable
note receivable

2

Periodic interest is the __________ times the __________ during the __________.

effective interest rate
amount of the debt outstanding
interest period

3

A bond issue divides a __________ into many __________.

large liability
smaller liabilities

4

Liabilities signify __________ interest in a company's assets.

creditor's

5

Bonds obligate the issuing corporation to repay a state amount at a specified __________ date.

maturity

6

In return for the use of the money, the company also agrees to pay __________ to bondholders between the ___________ and __________.

interest
issue date; maturity

7

A __________ describes specific promises made to bondholders.

bond indenture

8

Most corporate bonds are __________ bonds.

debenture

9

An exception is the __________, which is not entitled to receive any liquidation payments until the claims of other specified debt issues are satisfied.

subordinated debenture

10

Because a mortgage bond is considered less risky than debentures, it typically will command a __________ interest rate.

lower

11

Today most corporate bonds are __________ bonds. Years ago, it was typical for bonds to be structured as __________ bonds.

registered
coupon

12

What does it mean when bonds are "callable"?

The call feature allows the issuing company to buy back, or call, outstanding bonds from bondholders before their scheduled maturity date.

13

Mandatory sinking fund redemptions retire a bond issue:

gradually over its term to maturity

14

If a bond sells for more than face amount, it is at a __________.

premium

15

If a bond sells for less than face amount, it is at a __________.

discount

16

Other things being equal, the lower perceived riskiness of the corporation issuing bonds, the ___________ the price those bonds will command.

higher

17

A bond issue will be priced by the marketplace to yield the __________ of interest for securities of similar risk and maturity.

market rate

18

How do you calculate the present value (price) of the bonds?

Interest * PV of an Ordinary Annuity
+ Principal * PV of $1
-------------------------------------------
Present value of the bonds

19

What is the journal entry for when an issuer sells bonds at a discount?

Cash (price)
Discount on bonds payable (difference)
Bonds Payable (Face amount)

20

What is the journal entry for when an investor buys the bonds at a discount?

Investment in bonds (face amount)
Discount on bond investment (difference)
Cash (price)

21

How do we calculate effective interest on debt?

Outstanding balance * Effective Rate = Effective Interest
$663,633 * [14%/2] = $46,664

22

Recording interest each period as the effective market rate of interest multiplied by the outstanding balance of debt is referred to as the __________ method.

effective interest

23

The difference between the effective interest and the interest paid __________ the existing liability.

increases

24

What is the journal entry for when the issuer pays interest on debt outstanding?

Interest expense (effective rate * outstanding balance)
Discount on bonds (difference)
Cash (stated rate * face amount)

25

What is the journal entry for when the investor receives interest from the issuer?

Cash (stated rate * face amount)
Discount on bond investment (difference)
Interest revenue (effective rate * outstanding balance)

26

A __________ bonds pays no interest.

zero-coupon

27

Because interest is paid semiannually, the present value calculations use:

a. stated rate (12%) = ?
b. market rate (10%) = ?
c. semiannual periods (3 years) = ?

a. one-half the stated rate = 6% (12%/2)
b. one-half the market rate = 5% (10%/2)
c. semiannual periods = 6 years (3 years * 2)

28

What is the journal entry for when the issuer sells the bonds at a premium?

Cash (price)
Bonds payable (face amount)
Premium on bonds payable (difference)

29

What is the journal entry for when the investor buys the bonds at a premium?

Investment in bonds (face amount)
Premium on bond investment (difference)
Cash (price)

30

Since more cash is paid each period than the effective interest, the debt outstanding is __________ by the overpayment.

reduced

31

Whether the bonds are issued at a premium or a discount, the outstanding balance becomes _________ at maturity.

zero

32

Any interest that has accrued since the last interest date must be:

recorded by an adjusting entry prior to preparing financial statements

33

What is the journal entry for when the issuer accrues interest for four months?

Interest expense (4/6 *