Question;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. Registered;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.
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