Upgrade to remove ads
Chapter 10 ORION
Terms in this set (10)
Admire County Bank agrees to lend Givens Brick Company $600,000 on January 1st. Givens Brick Company signs a $600,000, 8%, 9-month note. if Givens Brick Company prepares financial statements on June 30th, the adjusting entry required would be
Interest Expense 24,000
Interest Payable 24,000
$600,000 × .08 × 6/12 = $24,000
Fun Fabrics has total receipts for the month of $25,200 including sales taxes. If the sales tax rate is 5%, what are Fun Fabric's sales for the month?
Intelligent Industries recently purchased a $50,000, 10% 12-month bond. From Intelligent's point of view, this bond would be considered a
current asset, because it represents a resource that can easily be converted to cash within one year.
Carlton Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $21,000. If the sales tax rate is 5%, what amount must be remitted to the state for February's sales taxes?
($21,000 ÷ 1.05) × .05 = $1,000
Melissa purchased a $2,000 bond issued by Green Enterprises on July 18, 2017. The bond is due in six years and has an annual rate of 7.9 percent. How much cash should Melissa expect to receive on the maturity date?
Melissa will receive an annual interest payment of $2,000 x 0.079 = $158. In addition, she will receive the face value of the bond, or $2,000. This gives a total of $2,158 due to Melissa on the maturity date.
Tedman Industries is planning to issue $5 million in bonds. Based on a poll of potential investors, they have the highest chance of raising the funds they need with one of four sets of bond characteristics. Which option would cost them the LEAST amount in total interest over the life of the bond?
10-year bond with 6.0% annual interest rate
The five-year bond will cost them $5 million x 0.075 x 5 = $1,875,000 in total interest. The six-year bond will cost them $5 million x 0.070 x 6 = $2,100,000 in total interest. The eight-year bond will cost them $5 million x 0.065 x 8 = $2,600,000 in total interest. The 10-year bond will cost them $5 million x 0.060 x 10 = $3,000,000 in total interest. Therefore, the five-year bond will cost them the least in total interest.
A company with a poor credit rating needs to raise funds for expansion, but the bank will not give them a loan. In addition, their common stock prices are already low, so they do not want to issue more shares of common stock. What would be the best way for this company to raise funds for the expansion?
Sell Secured Bonds
Although convertible or callable bonds may increase the attractiveness for investors, most investors will require some form of security that their investment will be paid back if the company has a poor credit rating. Therefore, the most important feature of the bonds is that they should be secured.
The current market interest rate for $1,000, 10-year bonds of large corporations in the food industry is 6.3 percent. If a large corporation in the food industry wants to sell $1,000, 10-year bonds with a 4.9% annual interest rate, what type of bond should they consider issuing?
One advantage of convertible bonds for the issuer is that bondholders are willing to accept a lower interest rate because they have an option of converting their bonds to common stock. Therefore, if a company wants to issue bonds at an interest rate that is lower than the current market interest rate, they should offer convertible bonds.
In what way are bonds sold by a company similar to common stock?
both are sold in small denominations
Choate International plans to issue $15 million in 10-year bonds. They believe they can afford to pay $1,150,000 in interest to bondholders each year. Which annual interest rate should they use for their bonds? The current market interest rate is 7.75% for similar bonds.
An annual interest rate of 7.65% would require Choate International to pay $1,147,500 in interest each year ($15 million * 0.0765 = $1,147,500). Both 7.75% and 8.1% would require them to pay more than $1,150,000 in interest, so those interest rates should not be used. An interest rate of 6.5% would allow them to pay less than their maximum interest amount, but the bonds would not be very competitive because the interest rate is below the market interest rate.
Recommended textbook explanations
Krugman's Economics for AP*
David Anderson, Margaret Ray
Principles of Economics
David Shapiro, Steven Greenlaw
Essentials of Investments
Alan J. Marcus, Alex Kane, Zvi Bodie
Essentials of Investments
Alex Kane, Zvi Bodie
Sets found in the same folder
Chapter 6 exam 2 adaptive practice
Accounting 2001 Final - LSU
Accounting Quizzes: CH 5 & 6
ACCT 2001 LSU Wiley Exam 2 review
Sets with similar terms
Accounting II Test 2
Ch 10 Reporting and Analyzing Liabilities
Chap 14 Long Term Liabilities
Other sets by this creator
BLW 2510 EXAM 1
Chapter 13 ORION
Chapter 11 ORION
Chapter 9 Orion
Other Quizlet sets
Final Exam terms
Period 5 Study Guide
International Relations Midterm, PLSC-102 Fall Mid…