general business data bank

205. Bonds that mature at a single specified future date are called _______________ bonds, whereas bonds that mature in installments are called ________________ bonds.

206. The terms of a bond issue are set forth in a formal legal document called a bond ________________.

207. Unsecured bonds that are issued against the general credit of the borrower are called ________________ bonds.

208. If bonds were issued at a premium, then the contractual interest rate was _____________ than the market interest rate.

209. Discount on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet. Premium on Bonds Payable is ________________ (from)(to) bonds payable on the balance sheet.

210. If bonds are issued at face value (par), it indicates that the ________________ interest rate must be equal to the ________________ interest rate.

211. If a $1 million, 10%, 10-year bond issue was sold at 97, the cash proceeds from the issuance of the bonds amounted to $________________.

Ans: N/A,

212. When bonds are converted into common stock and the conversion is recorded, the ________________ of the bonds is transferred to paid-in capital accounts.

213. A lease may be classified as an _______________ lease or as a ________________ lease.

^a214. The market price of a bond is obtained by discounting to its present value the _______________ paid at maturity, and all _____________ payments to be made over the term of the bond.

^a215. When there is a ________________ difference between the straight-line and effective-interest methods of amortization, the ________________ method is required under GAAP.

^a216. A method of amortizing bond discount or premium that allocates an equal amount each period is the ________________ method.

^a 217. The straight-line method of amortization allocates the same amount to _______________ in each interest period.

MATCHING

218. Match the items below by entering the appropriate code letter in the space provided.

A. Serial bonds G. Straight-line method of amortization

B. Debenture bonds H. Bonds

C. Bond indenture I. Debt to total assets ratio

D. Premium on bonds payable J. Capital lease

E. Discount on bonds payable K. Operating lease

F. Effective-interest method of amortization L. tered bonds

_____ 1. A contractual arrangement which is in effect a purchase of property.

_____ 2. A legal document that sets forth the terms of a bond issue.

_____ 3. Bonds that mature in installments.

_____ ^a4. Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds.

_____ 5. Bonds issued in the name of the owner.

_____ 6. A form of interest-bearing notes payable used by corporations.

_____ 7. Occurs when the contractual interest rate is greater than the market interest rate.

_____ 8. Unsecured bonds issued against the general credit of the borrower.

_____ 9. A contractual arrangement that gives the lessee temporary use of property.

_____ 10. A solvency measure that indicates the percentage of assets provided by creditors.

_____ 11. Occurs when the contractual interest rate is less than the market interest rate.

_____ ^a12. Produces a periodic interest expense that is the same amount each interest period.

SHORT-ANSWER ESSAY QUESTIONS

S-A E 219

Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates.

S-A E 220

A company desires to replace its current plant equipment with new equipment that costs $10,000,000. One possibility would be for the company to issue $10,000,000 of bonds and use the proceeds to purchase the equipment. Another possibility is to acquire the use of the equipment by signing a long-term capital lease with a leasing company. Describe and compare the financial statement effects of these two alternatives.

S-A E 221

When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate? Discuss.

.

S-A E 222

Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption.

S-A E 223

Kim Estes and Jeff Malone are discussing how the market price of a bond is determined. Kim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she right? Discuss.

S-A E 224

Megan Stone is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Megan is saying?

S-A E 225 (Ethics)

Jeff Tanner, a 26-year-old entrepreneur, started Bells & Whistles (B&W), Inc., a firm that specializes in top-of-the-line add-ons for computer systems. The firm has a capital structure of approximately 60% debt. This was necessitated by the rapid growth of B&W, and Mr. Tanner's lack of personal funds to sustain the growth. The 60% debt amount is quite high for firms in this field, and in fact slightly exceeds the debt covenants negotiated with the bank. B&W recently received notice that the bank considers the company's debt to be excessive, and that some accelerated repayment schedule will be adopted. The notice came at a particularly bad time. B&W is in the midst of a major upgrade of its own computer system. The hardware was to have been purchased outright, financed by the seller, Mike Kerr, longtime friend of Mr. Tanner.

Mr. Kerr really needs Mr. Tanner’s business. Both believe in the long-term strength of B&W. He therefore suggests to Mr. Tanner that the equipment be purchased by means of a short-term lease. Mr. Tanner could renew the lease annually.

Required:

1. Is Mr. Kerr’s suggestion ethical? Explain.

2. If Mr. Tanner accepts the suggestion, is he behaving ethically? Explain.

Ans: N/A,

S-A E 226 (Communication)

Susan Kline works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Lisa, works for Silver Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Silver's were issued at a premium. Lisa sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was—the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Silver Books.

Required:

Draft a short note for Susan to send to Lisa. Explain how such a result could occur.