Chapter 16

Question 1

Current Liability

Answer 1

paid within a year or less (or one operating cycle, whichever is longer)

Question 2

Long-term Liability

Answer 2

paid after one year (or one operating cycle, whichever is longer)

Question 3

bonds

Answer 3

formal written agreement of a long term liability (typically 3-10ish years). issuer agrees to pay back face value + interest

Question 4

the initial bond issuance is also called…

Answer 4

initial public offering

Question 5

primary market

Answer 5

the initial bond issuance

Question 6

who usually buys bonds on the primary market?

Answer 6

banks or investment companies

Question 7

does the secondary market impact the issuer’s financial statements?

Answer 7

no

Question 8

who usually buys bonds on the secondary market?

Answer 8

investors, sold by banks or investment companies

Question 9

when is principal paid back in a term bond?

Answer 9

at the end of the bond’s term

Question 10

when is principal paid back in a serial bond?

Answer 10

periodically (part principal, part interest)

Question 11

Callable Bond

Answer 11

can be redeemed early at the discretion of the issuer

Question 12

Convertible Bond

Answer 12

can be converted to another type of equity

Question 13

the bond indenture is the…

Answer 13

formal bond agreement

Question 14

who is the issuer?

Answer 14

the one borrowing money

Question 15

the issuer repays the…

Answer 15

principal + interest

Question 16

issuer is also known as…

Answer 16

debtor

Question 17

bond holder is also known as…

Answer 17

creditor or investor

Question 18

who is the bond holder?

Answer 18

the one who bought the bond, the one who gives money

Question 19

1st phase of initial bond issuance

Answer 19

approach the bank

Question 20

2nd phase of initial bond issuance

Answer 20

receive credit rating

Question 21

3rd phase of initial bond issuance

Answer 21

bond issued onto primary market

Question 22

in what phase is the stated rate given?

Answer 22

phases 1 and 2

Question 23

in what phase is the market rate given?

Answer 23

phase 3

Question 24

discount on bond payable is a ____________ account

Answer 24

contra-liability

Question 25

formula for carrying value

Answer 25

the bond payable plus the premium on bond payable OR minus the discount on bond payable

Question 26

selling price is also known as...

Answer 26

present value

Question 27

stated rate is also known as...

Answer 27

coupon rate, nominal rate, contractual rate

Question 28

market rate is also known as...

Answer 28

effective rate or yield rate

Question 29

what is the market rate?

Answer 29

the going rate for similar bonds on the exact day it is issued

Question 30

difference between market rate and stated rate

Answer 30

stated rate is the initial offering (what's in the contract). market rate is the going rate in present conditions.

Question 31

2 factors affecting difference between market rate and stated rate

Answer 31

passage of time and change in market conditions

Question 32

formula for rate

Answer 32

market rate / number of periods in a year

Question 33

formula for NPER

Answer 33

number of years * number of payments per year

Question 34

formula for PMT

Answer 34

face value of bond * stated rate / number of periods in a year

Question 35

FV

Answer 35

repayment of principal (negative usually)

Question 36

when is the bond issued at face value?

Answer 36

stated rate = market rate

Question 37

bond issued at a discount

Answer 37

creditor gave us less principal than we pay back

Question 38

when is a bond issued at discount (rates)?

Answer 38

when the market rate is higher than the stated rate

Question 39

when is a bond issued at a discount (selling price)?

Answer 39

when the selling price is lower than the face value

Question 40

bond issued at discount: ________ selling price, _______ market rates

Answer 40

lower, higher

Question 41

bond is always recorded at:

Answer 41

face value

Question 42

place in order on balance sheet: bond payable, liability, discount on bond payable

Answer 42

liability, bond payable, discount on bond payable

Question 43

when is a bond issued at premium (selling price)?

Answer 43

selling price is more than face value

Question 44

when is bond issued at premium (rates)?

Answer 44

stated rate is higher than market rate

Question 45

bond issued at premium: _______ selling price, ______ market rates

Answer 45

higher, lower

Question 46

cash is the ________, while bond payable is the _________

Answer 46

present value, face value

Question 47

what is protocol for a bond issued between periods?

Answer 47

creditor loans principal + missed interest, debtor pays back missed interest

Question 48

the ___________ method is GAAP preferred

Answer 48

effective interest

Question 49

formula for cash payments of interest

Answer 49

face value of bond * stated rate / number of periods in a year (same as pmt)

Question 50

formula for effective interest expense

Answer 50

carrying value of the bond at the beginning of period * market rate / number of periods in a year

Question 51

expense of borrowing money is ________

Answer 51

interest

Question 52

stock warrants

Answer 52

option to purchase shares of stock from the issuer (the right to buy stock in the future)

Question 53

strike price

Answer 53

the set price a creditor can buy stock at in the future

Question 54

nondetachable stock warrants

Answer 54

stock warrants that cannot be separated from the bond

Question 55

in a nondetachable bond, the entire bond price is allocated to:

Answer 55

bonds payable, nothing in equity

Question 56

paid-in capital is a(n) __________ account

Answer 56

equity

Question 57

detachable bonds have ________ and __________ methods

Answer 57

incremental and proportional

Question 58

incremental and proportional methods are part of ________ bonds

Answer 58

detachable

Question 59

in a detachable bond:

Answer 59

stock warrants have a determinable fair value

Question 60

in a detachable bond, the bond price is split between ________ and ________

Answer 60

bonds payable and equity

Question 61

the four accounts involved in detachable bonds are:

Answer 61

- cash - bonds payable - paid-in capital - stock warrants - premium/discount on BP

Question 62

the incremental method is used when:

Answer 62

we only know the value of the stock warrants, not the fair value of the bond

Question 63

the proportional method is used when:

Answer 63

we know the fair value of both the stock warrants and the bonds

Question 64

in the proportional method, the formula for journal entries of bonds payable and paid-in capital is:

Answer 64

bond payable: face value paid in capital: (FVM of warrants/total FVM) * cash received premium/discount: difference between face value and proportion of bond

Question 65

the common stock account is always recorded at _________

Answer 65

par

Question 66

when warrants expire or are exercised, they are moved into the ___________ account

Answer 66

paid in capital- common stock

Question 67

which accounts related to bonds are on the balance sheet?

Answer 67

- liabilities - bonds payable - less: discount / add: premium - carrying value

Question 68

which accounts related to bonds are on the income statement?

Answer 68

other revenues/expenses (interest expense)

Question 69

______________ and ___________ accounts are plug accounts

Answer 69

paid-in capital: common stock and premium/discount on bonds payable

Question 70

which account is debited in relation to a cash incentive for bond holders to convert their bond?

Answer 70

debt conversion expense