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