Question 1

From the standpoint of the issuing company a disadvantage of using bonds as a means of long-term financing is that

Accepted Answer

Bonds require periodic interest payments, regardless of the company's earnings. This can be a disadvantage as it may constrain the company's cash flow and limit its ability to invest in growth opportunities. Additionally, if the company is unable to make these payments, it may lead to default and damage the company's financial reputation.

Question 2

The market rate of interest is often called the

Accepted Answer

The market rate of interest is often referred to as the effective rate. This is because it reflects the actual cost of borrowing when considering compounding periods, unlike the stated, coupon, or contractual rates which may not account for the frequency of compounding.

Question 3

Julie Lambert has a large consulting practice.New clients are required to pay one-half of the consulting fees up front.The balance is paid at the conclusion of the consultation.Lambert's recording of the cash received at the end of the engagement includes a(n)

Accepted Answer

The initial payment from new clients is recorded as an increase to Cash and an equal decrease to Unearned Service Revenue. When the consulting engagement is concluded, the remaining balance is received and recorded as an increase to Cash, a decrease to Unearned Service Revenue, and an increase to Service Revenue. This reflects the earning of revenue for the consulting services provided during the engagement.

Question 4

If bonds are issued at a discount it means that the

Accepted Answer

When bonds are issued at a discount, it means that their market price is below their face value or par value. This happens when the market interest rate is higher than the contractual interest rate. Because investors can buy other similar bonds with higher interest rates, they will only be willing to pay less for the lower-yielding bond. Thus, bonds issued at a discount do not necessarily indicate a suspect financial strength of the issuer, but rather reflect the prevailing market conditions. Bondholders will still receive the contractual rate of interest, but as a proportion of the lower market price, their effective interest rate will be higher.

Question 5

The statement "Bond prices vary inversely with changes in the market rate of interest" means that if the

Accepted Answer

When the market rate of interest decreases, existing bonds with a higher contractual interest rate become more attractive, causing their prices to increase. Conversely, when the market rate of interest increases, existing bonds with a lower contractual interest rate become less attractive, causing their prices to decrease. Therefore, bond prices vary inversely with changes in the market rate of interest.

Question 6

Mohling Company typically sells subscriptions on an annual basis and publishes eight times a year.The magazine sells 60000 subscriptions in January at $10 each.Recording the sale of the subscriptions involves a(n)

Accepted Answer

When subscriptions are sold, the company receives the cash upfront but the revenue must be recognized over the course of the subscription period. Therefore, the sale of 60,000 subscriptions for $10 each would result in $600,000 of cash received but only $75,000 of revenue recognized in January ($10 per subscription for 8 issues, with only one issue released in January). The remaining $525,000 of cash received ($600,000 - $75,000) would be recorded as Unearned Subscription Revenue, as the revenue has not yet been earned by providing the remaining issues. So, there would be an increase in Cash and an increase in Unearned Subscription Revenue for $600,000.

Question 7

Molina Corporation issues 5000 10-year 8% $1000 bonds dated January 1 2021 at 103.Recording the issuance will show a(n)

Accepted Answer

The issuance of the bonds will increase the Bonds Payable account for the face value of the bonds, which is $5,000,000 ($1000 x 5000). The fact that the bonds are issued at 103 means that the company receives a premium, which will increase the Total Liabilities account. However, since the question only asks for the recording of the issuance, the premium is not explicitly mentioned in the answer choices. Therefore, the best choice is C, which accurately reflects the increase to Bonds Payable.

Question 8

Madson Company typically sells subscriptions on an annual basis and publishes six times a year.The magazine sells 90000 subscriptions in January at $10 each.Recording the sale of the subscriptions involves a(n)

Accepted Answer

When customers pay for an annual subscription upfront, it is recorded as unearned subscription revenue initially as the company has not yet delivered the magazines. When the magazines are published and delivered, the unearned revenue is recognized as subscription revenue. Therefore, the sale of 90000 subscriptions in January at $10 each will result in an increase to Cash (as money has been received), and an increase to Unearned Subscription Revenue (as the magazines have not yet been delivered). The total amount recorded will be $900000. Therefore, option B is the correct answer. Options A, C, and D are incorrect as they do not accurately reflect the revenue recognition principles of subscription-based businesses.

Question 9

If bonds are issued at a premium the stated interest rate is

Accepted Answer

If bonds are issued at a premium, it means the selling price of the bond is higher than its face value. This implies that investors are willing to pay more than the par value of the bond because the stated interest rate is higher than the prevailing market rate.

Question 10

Over the term of the bonds the balance in the Discount on Bonds Payable account will

Accepted Answer

The answer of Over the term of the bonds the...

Question 11

Gomez Corporation issues 900 10-year 8% $1000 bonds dated January 1 2021 at 96.Recording the issuance will show a(n)

Accepted Answer

The bonds are issued at 96, meaning they are sold at 96% of their face value. The face value of the bonds is $900,000 (900 bonds x $1,000 each), so the cash received is 96% of $900,000, which is $864,000.

Question 12

If the market interest rate for a bond is higher than the stated interest rate the bond will sell at

Accepted Answer

When the market interest rate is higher than the stated interest rate of a bond, it means that potential buyers can obtain a higher return on their investment by purchasing a bond with a higher interest rate. As a result, the bond with the lower interest rate will sell at a discount in order to make it more attractive to buyers.

Question 13

The interest expense recorded on an interest payment date is increased

Accepted Answer

The interest expense recorded on an interest payment date is increased by the amortization of discount on bonds payable, which occurs when the market interest rate is higher than the stated interest rate. This results in the bond being sold at a discounted price, with the difference being amortized as interest expense over the life of the bond. Amortizing a premium on bonds payable would have the opposite effect, reducing the interest expense recorded on an interest payment date. The fact that the bonds were sold at face value or that the market rate of interest is less than the stated rate of interest on that date does not necessarily impact the interest expense recorded.

Question 14

When bonds are issued at a premium the total interest cost of the bonds over the life of the bonds is equal to the amount of

Accepted Answer

The answer of When bonds are issued at a premium...

Question 15

The contractual interest rate on a bond is often referred to as the

Accepted Answer

The contractual interest rate on a bond is commonly referred to as the "stated rate." This is the rate that is established at the time the bond is issued and is specified in the bond indenture. It is the rate used to calculate the amount of interest the issuer will pay to the bondholder over the life of the bond.

Question 16

If the market rate of interest is lower than the contractual interest rate the bonds will sell at

Accepted Answer

The answer of If the market rate of interest is...

Question 17

The carrying value of bonds will equal the market price

Accepted Answer

The carrying value of bonds is the initial amount stated on the balance sheet when they were issued. It does not change based on market fluctuations, so it will not equal the market price at any point in time.

Question 18

If the market rate of interest is greater than the contractual rate of interest bonds will sell

Accepted Answer

When the market rate of interest is greater than the contractual rate of interest, the bond becomes less attractive to buyers since they can earn a higher return elsewhere. To compensate, the bond will sell at a discount, meaning it will be priced below its face value.

Question 19

Selling the bonds at a premium has the effect of

Accepted Answer

The answer of Selling the bonds at a premium has...

Question 20

Yanik Corporation issues 5000 10-year 8% $1000 bonds dated January 1 2021 at 97.Recording the issuance will show a(n)

Accepted Answer

The bonds are issued at 97, which means they are issued at 97% of the face value. The discount on bonds payable is the difference between the face value and the cash received, which is $5,000,000 - $4,850,000 = $150,000.

Quiz 8: Financial Analysis: the Big Picture