Final Exam Review Ch. 10

Question 1

Define a bond.

Answer 1

An issuer’s promise to pay the par value of a bond with interest.

Question 2

Define par value.

Answer 2

The amount the bond issuer agrees to pay at maturity and The amount on which cash interest payments are made.

Question 3

What are the 3 advantages of Bond Financing?

Answer 3

1. No effect on owner control
2. Interest is tax deductible
3. Can increase return on equity

Question 4

What are the 2 disadvantages of Bond Financing?

Answer 4

1. Can decrease return on equity
2. Require both period interest and par value at maturity

Question 5

Define bond indenture.

Answer 5

The legal contract between the issuer and bond holder.

Question 6

What are par bonds?

Answer 6

Bonds issued at par value.

Question 7

When do bonds sell at par value

Answer 7

Par value = market rate

Question 8

When do bonds sell at a discount?

Answer 8

When par value is less than market rate

Question 9

When do bonds sell at a premium?

Answer 9

When par value is more than market rate.

Question 10

What is discount on bonds payable?

Answer 10

A contra liability account with a normal debit balance.

Question 11

what does it mean to amortize a bond discount?

Answer 11

To reduce the bond discount to $0 over the life of the bond.

Question 12

What method do we use to amortize bonds?

Answer 12

Straight-line method

Question 13

What is a premium on bonds payable?

Answer 13

An add-on liability account with a normal credit balance.

Question 14

What are the 2 ways to retire bonds?

Answer 14

1. At maturity
2. Before maturity

Question 15

What are the two ways to retire bonds before maturity?

Answer 15

1. Exercise a call option
2. Open market purchase

Question 16

What does it mean to exercise a call option?

Answer 16

The issuer issues callable bonds before they mature by paying par value + a call premium.

Question 17

What does it mean to have an open market purchase?

Answer 17

The issuer repurchases bonds from bondholders at current market price.

Question 18

On January 1, $58,000 cash was borrowed from a bank in return for a 8% installment note with 24 monthly payments of $2,623 each.

NOTE: Round answers to the nearest whole dollar
1. Prepare the journal entry to record the issuance of the note
2. Prepare the journal entry to record the first monthly interest payment

Answer 18

Jan. 1
Cash 58,000
Notes Payable 58,000
Jan. 31
Interest Expense 387
Notes Payable 2,237
Cash 2,623