Chapter 15 Bond Basics Quiz

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Questions and Answers

What is the name of the amount due at maturity for a bond?

Maturity Date

Contractual Interest Rate

Face Value (correct)

Market Value

What factor does NOT directly influence the market value of a bond?

The amount to be received at maturity

The market rate of interest

The company's credit rating (correct)

The time until maturity

When are bonds typically issued at face value?

When the market interest rate is lower than the contractual rate

When the company is in a strong financial position

When the market interest rate is higher than the contractual rate

When the market interest rate is equal to the contractual rate (correct)

What is the effective-interest method used for?

Calculating the amount of interest expense to be recognized each period (C) Signup and view all the answers

What is the main difference between bonds and shares?

Bonds have a fixed maturity date, while shares don't. (B) Signup and view all the answers

How frequently are interest payments on bonds typically made?

Semi-annually (D) Signup and view all the answers

What is the purpose of the bond certificate?

To record the details of the bond issuance (B) Signup and view all the answers

In what way are bonds similar to shares of public corporations?

They are both traded on organized securities exchanges. (B) Signup and view all the answers

What is the reason bonds are issued at a discount?

The contractual interest rate is lower than the market interest rate. (B) Signup and view all the answers

How is the discount on bonds payable treated on the balance sheet?

It is deducted from the face value of the bonds payable. (B) Signup and view all the answers

What is the first step in calculating the amortization of a bond discount?

Calculate the bond interest paid. (A) Signup and view all the answers

How does the amortization of a bond discount affect the carrying value of the bond?

It increases the carrying value of the bond. (D) Signup and view all the answers

What is the effect of issuing bonds at a premium on the cost of borrowing?

It decreases the cost of borrowing. (D) Signup and view all the answers

How is the premium on bonds payable treated on the balance sheet?

It is added to the face value of the bonds payable. (D) Signup and view all the answers

What is the effect of amortizing a bond premium on the carrying value of the bond?

It decreases the carrying value of the bond. (C) Signup and view all the answers

What is the effect of amortizing a bond premium on the interest expense?

Interest expense decreases as the carrying value of the bond decreases towards its face value. (A) Signup and view all the answers

How is the amortization amount for a bond premium determined?

By subtracting the carrying value of the bond from the face value of the bond. (C) Signup and view all the answers

What is the carrying value of a bond at maturity?

Equal to the face value of the bond, regardless of the issue price. (C) Signup and view all the answers

What is the key difference between the interest expense recorded for a bond issued at a premium versus a bond issued at a discount?

Interest expense for a premium bond decreases over time, while for a discount bond, it increases over time. (C) Signup and view all the answers

What is the purpose of recording the redemption of bonds before maturity?

To account for the difference between the cash paid and the amortized cost of the bonds. (C) Signup and view all the answers

When a bond is redeemed before maturity, what adjustments, if any, are made to interest expense?

Interest expense is adjusted to reflect the interest accrued from the last interest payment date up to the redemption date. (D) Signup and view all the answers

When a bond is redeemed before maturity, and the cash paid is less than the amortized cost of the bonds, what does this indicate?

The issuer has recorded a gain on redemption. (D) Signup and view all the answers

When a bond is issued at a premium, how does the premium affect the calculation of interest expense over the life of the bond?

The premium is amortized over the life of the bond, reducing interest expense. (A) Signup and view all the answers

What is the main distinction between issuing debt and issuing equity?

Debt financing involves borrowing money that must be repaid, while equity financing involves selling ownership shares. (C) Signup and view all the answers

What is the key characteristic that distinguishes bonds payable from other non-current liabilities?

Bonds payable represent a specific contractual obligation with a fixed interest rate. (D) Signup and view all the answers

What is the accounting treatment for installment notes payable?

Each payment is recorded as a reduction of the principal balance and an expense for the interest portion. (B) Signup and view all the answers

What is the primary purpose of presenting non-current liabilities separately on the balance sheet?

To highlight the company's long-term debt obligations and their potential impact on future financial performance. (C) Signup and view all the answers

What is the most common method for analyzing non-current liabilities?

Interest coverage ratio, which assesses the company's ability to meet its interest obligations. (A) Signup and view all the answers

What is the significance of the debt-to-equity ratio in analyzing non-current liabilities?

It shows the proportion of debt relative to equity, indicating the company's financial risk. (A) Signup and view all the answers

What is NOT a common method for presenting non-current liabilities on the balance sheet?

Listing liabilities in order of maturity date, starting with the earliest maturity. (D) Signup and view all the answers

Why is it crucial to analyze non-current liabilities in relation to a company's financial performance?

It helps investors understand the company's ability to meet its long-term financial obligations. (C) Signup and view all the answers

What is a non-current liability?

Debt that will be settled in over one year or the company's normal operating cycle. (B) Signup and view all the answers

What are the two main types of non-current liabilities?

Bonds Payable and Notes Payable (C) Signup and view all the answers

Which of the following is an advantage of debt financing over equity financing?

The return on equity may be higher. (B) Signup and view all the answers

Which of the following is a disadvantage of debt financing?

Earnings per share may be lower. (A) Signup and view all the answers

Which of the following is a benefit of debt financing over equity financing?

Debt financing can lead to a higher return on equity. (D) Signup and view all the answers

What is meant by 'financial liabilities'?

Liabilities that are related to the company's financing activities. (C) Signup and view all the answers

What is the main reason why debt financing can lead to a higher return on equity?

Debt financing reduces the amount of equity in the company. (A) Signup and view all the answers

Why is interest expense deductible for income tax purposes?

All of the above. (D) Signup and view all the answers

What is the key difference between short-term notes payable and installment notes payable?

Short-term notes payable have a term of less than one year, while installment notes payable have a term exceeding one year. (B) Signup and view all the answers

Which of the following is NOT a characteristic of installment notes payable?

They are typically paid back in a single lump sum. (A) Signup and view all the answers

When a note payable has fixed principal payments, how do the periodic payments change over time?

The payments vary because they include both fixed principal payments and variable interest payments. (A) Signup and view all the answers

What is the difference between a secured and an unsecured installment note payable?

Secured notes are backed by collateral, while unsecured notes are not. (A) Signup and view all the answers

What is the primary characteristic of a blended payment note payable?

The payments are equal, but the amount of principal and interest changes with each payment. (A) Signup and view all the answers

When a company issues bonds payable, what is the effect on its liabilities?

Liabilities increase due to the creation of a new debt obligation. (B) Signup and view all the answers

Which of the following is NOT a factor that would influence the interest rate on a note payable?

The specific assets used as collateral. (C) Signup and view all the answers

What is the primary purpose of analyzing non-current liabilities?

To assess the company's long-term financial stability and risk. (A) Signup and view all the answers

Study Notes

Financial Accounting Chapter 15

This chapter covers non-current liabilities, specifically bonds payable and notes payable.
Key learning goals include understanding debt financing, comparing debt and equity financing, and accounting for bonds payable.
Non-current liabilities are debts not due within one year or the normal operating cycle.
Common types include bonds payable and notes payable.
Bonds payable involve bond basics, accounting for bond issues, and retirements.
Notes payable include fixed principal payments and blended payments.
Success criteria for the chapter include comparing debt and equity impact, handling bonds payable, and understanding note payable accounting.

Textbook Reading

Students must review pages 628-629 and answer associated questions regarding non-current liabilities.

Bond Basics

A board of directors approves bond issuance.
Face value is the amount due at maturity.
Coupon rate is the contractual interest used for calculating interest received.
Usually an annual rate, paid semi-annually.
Maturity date is when the final payment is due.
Bond details are included in the certificate.
Like shares, bonds trade on organized security exchanges.
Bonds are commonly issued with small denominations (e.g., $1,000).

Determining Market Value of Bonds

Present value is the amount invested today at a specific interest rate over a certain time.
Market value (present value) is determined by three factors: dollar amounts to be received, length of time until received, market interest rates.
Present value tables/formulas are used for determining present value.

Issuing Bonds at Face Value

If market interest rate = contractual rate, bonds are issued at face value.
This involves journal entries for cash and bonds payable to record the bond sale.
Effective-interest method is used for recording semi-annual interest payments.

Textbook Questions

Specific textbook questions referenced include BE15-2, E15-1, BE15-5, BE15-5b, BE15-5c, E15-3, E15-4.

Amortizing Bond Discount/Premium

Explained as a three-step process and details are provided on how to calculate bond interest paid, calculate interest expense, and determine amortization amount.
Subsequent periods use a similar calculation method for the discounted bond.
In the premium calculation method, the carried amount of the bond decreases over time.

Group Work Questions

Specific group-related questions and assigned individuals for review are provided. Group assignments include BE15-8, BE15-9, BE15-10, and E15-6.

Installment Notes Payable

Similar to short-term notes payable, but the term exceeds one year.
Interest can be fixed or variable.
Secured notes are like mortgages (secured by assets).
They're repaid in instalments consisting of principal plus interest, either fixed or blended.

Notes Payable: Fixed Principal Payments

Periodic payments vary due to changing interest owed.
Principal is repaid equally across periods.
Interest is based on the outstanding principal balance.

Notes Payable: Blended Payments

Equal periodic payments include principal and interest.
Interest and principal amounts change with each payment.
Interest decreases, and principal increases with each period.

Statement Presentation

Non-current liabilities are reported separately after current liabilities on the balance sheet.
Specific examples are given of how to present balance sheets (such as Wick Company LTD's).

Textbook Review Questions

Review questions are listed.

Textbook Questions (Additional)

Further textbook questions are detailed.

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Description

Test your knowledge on the fundamentals of bonds with this quiz. From bond valuation factors to the effective-interest method, explore various aspects of bond issuance and accounting practices. Perfect for students and finance enthusiasts looking to deepen their understanding of bonds.